Coordination on Networks C. Matthew Leister∗

Yves Zenou†

Junjie Zhou‡

December 1, 2017

Abstract We study a coordination game among agents on a network, who choose whether or not to take an action that yields value increasing in the actions of neighbors. In a standard global game setting, players receive noisy information of the technology’s common state-dependent value. We show the existence and uniqueness of a pure equilibrium in the noiseless limit. We derive limiting cutoffs, which allocate players into coordination sets, within members take a common cutoff strategy and are path connected. We provide necessary and sufficient conditions for agents to inhabit the same coordination set. The strategic effects of perturbations to players’ underlining values are shown to spread throughout but be contained within the perturbed players’ coordination sets. Welfare properties are investigated. Keywords: global games, coordination, network partition, welfare. JEL: D85, C72, Z13.

∗

Monash University, Australia. Email: [email protected] Monash University, Australia, IFN and CEPR. Email: [email protected] ‡ National University of Singapore. Email: [email protected] 1 We thank Francis Bloch, Arthur Campbell, Bo˘ ga¸chan C ¸ elen, Yi-Chun Chen, Ying-Ju Chen, Chris Edmond, Matt Elliott, David Frankel, Ben Golub, Sanjeev Goyal, Matt Jackson, Jun-Sung Kim, Stephen Morris, Alex Nichifor, and Satoru Takahashi for helpful comments. †

1

1

Introduction

Settings with binary actions and positive network effects are ubiquitous: the choice to adopt a technology or platform, such as in social media, where the value of the technology/platform is increasing in the adoption by friends; the choice to partake in crime, when the proficiency of crime, and thus the likelihood of not getting caught, is increasing in the criminality of accomplices; or, the implementation of defense or anti-immigration policies, when the likelihood of attack or the influx of migrants depends on policies employed in neighboring countries. In each of these examples, uncertainty in a common state can also influence the value of adoption: the underlining value of the technology; the strength or presence of the police force; the aggression of attackers or the state of the economy. This paper studies coordination in these uncertain environments. The ensuing model employs the tools of global games embedded into a network game. Players’ positions in the network define their preferences over the action choices of others. Using the language of technology adoption, the total value an agent receives from adopting the technology is increasing in the technology’s underlining value (the state) and in the adoption by neighbors. Agents receive noisy signals informing them of the state. In equilibrium, agents further use their private information to infer the observations and actions of neighboring agents, and anticipate the ultimate value they will enjoy from adopting the technology. The classic equilibrium selection of global games obtains. In our setting with binary actions, the equilibrium selected in the noiseless limit comes in the form of cutoff strategies. Each agent adopts the technology when their private signal exceeds their equilibrium cutoff, a cutoff determined by the agent’s position in the network. We explore the role of the network’s architecture in determining who coordinates their adoption choices with whom. The analysis begins by calculating limiting cutoffs, which allocate players to coordination sets. These coordination sets are defined by path-connected agents taking a common cutoff strategy. The analysis then provides necessary and sufficient conditions for a set of agents to inhabit a common coordination set. To establish this characterization, we construct a network flow problem, and apply Gale’s Demand Theorem (see Gale (1957)) to establish a balance in incentives to adopt across all members of the coordination set. To study the role of network structure, we first consider the case of homogeneous values where the network alone introduces (ex ante) heterogeneity across agents. We give an exact condition for which a single coordination set exists in the network. This condition 2

says that the network structure must be balanced, that is, that the average degree of each sub-network (composed of any nonempty subset of agents in the network) is not greater than the average degree of the original network. To understand this, consider any core-periphery network, with regular core of degree dc and size nc , and with np periphery nodes, each connected to k core nodes symmetrically. This graph is balanced if and only if dc ≤ 2k, which means that either the core is not very dense (as, for example, in a star network), or the number of links to the core is very large. Otherwise the periphery nodes will have a strictly higher cutoff than the core nodes and there will be more than one coordination set. This network characterization to global coordination implies that under homogeneous values, strikingly, agents with arbitrarily different degrees may belong to the same coordination set. For example, in a star network, regardless of the number of peripheral agents, all agents coordinate together in the limit, meaning that they adopt the technology under the same set of states.1 To better understand this result, near the noiseless limit equilibrium cutoffs for the center and the peripheral agents must lie within each others’ noise supports. Therefore, in the limit, the center and periphery agents must take identical cutoff strategies. Upon increasing the size of the core, network effects within the core become sufficiently reinforcing so that the core agents may take a strictly lower cutoff than the peripheral agents. In fact, the selection of an equilibrium that exhibits a common cutoff across all agents within the network is shown to extend to all regular networks, tree networks and regular-bipartite networks.2 For regular networks, the homogeneity of degree leads to a common cutoff. In trees, it is the absence of multiple cycles (closed walks) which guarantees a common cutoff. In regular-bipartite networks, the short side of the network modulates the cutoff shared by both sides. The robust coordination exhibited in the model is no less interesting when multiple cutoffs obtain. As an initial illustration of this, we provide conditions under which additional links between coordination sets impose zero influence on the equilibrium play of the coordination set taking a lower cutoff. For example, as a lone peripheral agent sequentially links to a clique, each link influences the lone agent’s cutoff while the clique remains unaffected, until a threshold number of links are established, after which the full network begins to coordinate together. We explore these properties in help-decision networks in rural India and in friendship networks in the U.S. 1

Indeed, using the notations above, for the star network, dc = 0 < 2k = 2, so this network is balanced. A formal definition to regular-bipartite networks is provided in Section 5. A common cutoff is also shown to obtain in networks that have a unique cycle and those that have at most four nodes. 2

3

Upon introducing heterogeneous values, we can extend and more broadly characterize the robust coordination described under homogeneous values. First, we establish a generalized notion of network balance, where both network effects and intrinsic valuations matter. The attainment of a common cutoff within each coordination set is shown to be robust to perturbations to the intrinsic (state independent) value of the technology to any given agent. Holding fixed other parameters of the model, we characterize the range of intrinsic values that support an agent’s coordination with her coordination set. The size of this support is shown to be strictly increasing in the relative size of network effects: coordination becomes increasingly sticky as network effects strengthen. Perturbations are shown to influence equilibrium adoption only across members within the perturbed agent’s coordination set. Thus, the contagion of such perturbations extends within coordination sets, but discontinuously drops to zero across coordination sets: contagion in contained. On the contrary, large changes to intrinsic values can alter the composition of coordination sets across the network. We explore the welfare and policy implications of the model. We derive the marginal gains to a policy designer aiming to maximize (i) ex-ante adoption and (ii) welfare (i.e. the benevolent planner) across the network, via subsidizing the adoption of one agent. We show that the marginal impact of these targeted policies become independent of the particular target chosen from the target’s coordination set. That is, optimal policy design becomes a problem of targeting a given coordination-set rather than a particular agent. For policies maximizing ex-ante adoption, the designer faces the following tradeoff. If she subsidizes adoption within large interconnected coordination sets where strategic contagion is relatively broad, the influence of the intervention on the targeted coordination set will be limited due to the stickiness of coordination. That is, while the intervention reaches a large set of agents, the direct impact of the intervention can be dampened by the target’s coordination with her coordination set. We show that in the limit these effects perfectly balance, with the planner’s objective reducing to a function of the targeted coordination set’s equilibrium cutoff. The tradeoffs faced by the benevolent planner are more complex. Ex ante, policy interventions impose positive externalities on neighboring agents in coordination sets taking lower cutoffs, though having no influence on their equilibrium behaviors. This establishes a fundamental wedge between the objectives of designers aiming to maximize adoption versus ex-ante welfare. Now, the benevolent planner must balance the direct effects on the target’s welfare, the value through contagion from targeting the largest coordination sets, and the gains from direct externalities to coordination sets taking 4

lower cutoffs. The paper is organized as follows. In the next section, we relate our paper to the relevant literature. Section 3 introduces the model. Section 4 establishes the limit equilibrium and refines it to cutoff strategies, calculates limiting cutoffs, and characterizes common coordination in general settings. In Section 5, we characterize the equilibrium under homogeneous valuations and partition players into coordination sets. In Section 6, we generalize the analysis of coordination and contagion to heterogeneous valuation settings. Section 7 discusses the welfare and policy implications of the model. Section 8 discusses extensions and applications to platform adoption, crime, and immigration policy. Finally, Section 9 concludes. All proofs can be found in the Appendix. An Online Appendix addresses extensions and numerical solutions discussed in the sequel.

2

Related Literature

This paper adds to the growing literature on network games.3 Ballester et al. (2006), and more recently Bramoull´e et al. (2014) characterize conditions for equilibrium existence and uniqueness when actions are continuous and best replies are linear.4 Galeotti et al. (2010) obtain multiplicity of equilibria in games under more general best replies, under incomplete and symmetric information of the extended network structure (beyond own degree). The present paper takes strategic complements under incomplete information. While multiple equilibria again obtain under complete information, noisy information of a common fundamental state provides a unique equilibrium selection in the noiseless limit of our game. This paper also adds to a younger literature on network games with incomplete information. Calv´o-Armengol et al. (2007) and De Marti and Zenou (2015) study the linear-quadratic setting of Ballester et al. (2006) under the enrichment of a Bayesian game. Calv´o-Armengol et al. (2015), Leister (2017) and Myatt and Wallace (2017) incorporate endogenous investment in signal precision in these settings. And in a different vein, Hagenbach and Koessler (2010) and Galeotti et al. (2013) study cheap-talk in networks. Golub and Morris (2017a,b) study consistency and convergence in higher order expectations in Bayesian network games under linear best replies. The current paper diverges from these contributions by focusing the analysis near and in the noiseless limit, 3

See Jackson (2008) chapter 9, Jackson and Zenou (2015) and Bramoull´e and Kranton (2016) for surveys. 4 These conditions involve bounding eigenvalues of transformations of the network’s adjacency matrix.

5

and taking actions to be binary. Carlsson and van Damme (1993) first exhibited this selection devise for global games of two players and two actions.5 Frankel et al. (2003) extend the result to arbitrary games of strategic complements. Our paper sits in the middle, employing the structure of a network game under binary actions toward characterizing the topology of equilibrium coordination. In a two-sided environment, Morris and Shin (1998) provide closed forms to their common limit-equilibrium cutoff, toward studying the interaction of a government defending a currency from a continuum of currency speculators. The ensuing model can be viewed as a network of governments interacting, while abstracting away from the role of speculation within each country.6 S´akovics and Steiner (2012) study policy impact in a global game with a continuum of agents who value an agent-weighted average action. In the current paper, the network’s architecture determines whether a common or multiple limit cutoffs obtain in the noiseless limit. Our policy analysis contrasts adoption-based with welfare-based policies to establish a basic wedge between the two benchmarks, a wedge which only obtains under multiple cutoffs.7 Dai and Yang (2017) study a similar model to S´akovics and Steiner (2012) in which the continuum of agents carry private information regarding idiosyncratic costs of adoption, incorporating multiple cutoffs in the noiseless limit. In this setting, the authors focus on the role organizations in mitigating miscoordination. Our results also bare on those of the network contagion literature. Morris (2000), and recently Jackson and Storms (2017) study coordination games on a network under complete information, characterizing equilibrium adoption via the property of “cohesion” within subsets of players.8 While connectivity within agent sets similarly plays an important role in the ensuing model (Proposition 6, below), the global game selection insures a unique prediction of coordination amongst agents.9 Elliot et al. (2014) and Acemoglu et al. (2015) model the clearing of liabilities between institutions. The contagion of the 5

They show the risk-dominant equilibrium to be selected in these games. Equilibrium selection (Frankel et al. (2003) Theorem 5) along with all network characterizations of Section 4 are robust to the inclusion of speculators at each node (country). Related applications include crises and banks runs; see Dasgupta (2004), Goldstein and Pauzner (2004, 2005), and Rochet and Vives (2004). 7 S´akovics and Steiner find the optimal adoption-minimizing subsidy targets agents with high influence while being relatively uninfluenced by others. 8 In the present paper, the value of adoption is a function of the total number of neighbors adopting, rather than the fraction of neighbors adopting. Moreover, incomplete information of a common state with equilibrium selection are significant departures from these works. 9 In a setting similar but more general than Morris (2000) where an infinite population of players interact locally and repeatedly, Oyama and Takahashi (2015) determine when a convention spreads contagiously from a finite subset of players to the entire population in some networks. 6

6

ensuing model offers an alternative prediction to the spread of perturbations over the network, while incorporating strategic play, be it under a more elemental machinery.

3

Model Setup

A finite set of agents N simultaneously choose whether or not to adopt a technology.10 ai ∈ {0, 1} will denote agent i’s choice to adopt. The components of the model are defined as follows. Payoffs. Payoffs from adopting the technology depend on the underlying fundamental θ, continuously distributed over bounded, interval support Θ ⊆ R. Moreover, the agents are connected via a network G = (N, E). E defines the set of edges between unordered pairs ij taken from N . We assume a connected and undirected graph: i ∈ Nj if and only if j ∈ Ni , where Ni := {j : (i, j) ∈ E} is the set of i’s neighbors, and di := |Ni | her degree. Then, each i obtains the following payoff from adopting: ui (a−i |θ) = vi + σ(θ) + φ

X

aj

(1)

j∈Ni

where vi ∈ R, σ : Θ 7→ R, and φ > 0. vi gives the intrinsic (state independent) value to i from adopting, σ the state dependent value, with each of i’s neighbors’ adoption positively influencing the technology’s value. σ(θ) is assumed to be differentiable and strictly increasing in θ. The network effect φaj in (1) captures the positive externality that j’s adoption imposes on i, while φ uniformly scales the size of network effects. The value to each agent from not adopting the technology is normalized to zero. Dominance Regions. For each i, we assume vi , σ and φ are such that there exist θi and θi such that vi + σ(θ) + φdi < 0 when θ < θi and vi + σ(θ) > 0 when θ > θi . Thus, there exist dominant regions [min Θ, θ] and [θ, max Θ], with θ := mini {θi } and θ := maxi {θi }, such that not adopting and adopting the technology (respectively) are dominant strategies for all players. When the realization of θ is common knowledge amongst agents, with σ continuous in θ and φ > 0, there can exist a strictly positive measure of θ realizations within [θ, θ] at which multiple pure strategy Nash equilibria occur. 10 For the sake of the exposition, we use the example of technology adoption but, of course, any {0, 1} binary actions will yield the same results.

7

Information Structure. In the perturbed game, θ is observed with noise by all agents. Each i realizes signal si = θ + νǫi , ν > 0, where ǫi is distributed via density function f and cumulative function F with support [−1, 1]. All signals are independently drawn across agents conditional on θ. S denotes the support of signal realizations. For each ν > 0, we write G(ν) the corresponding global game.11,12

4 4.1

Limit Equilibrium Existence and Uniqueness of Limit Equilibrium

G(ν) gives a Bayesian game of strategic complements between agents. Agent i chooses (possibly mixed) signal-contingent strategy πi : S 7→ [0, 1], mapping each signal realization to the likelihood i adopts. We write π := (π1 , . . . , πN ) and denote π ∗ a Bayesian Nash Equilibrium of G(ν). Frankel et al. (2003) Theorem 1 establishes uniqueness of a limiting mixed-strategy equilibrium in general global games of strategic complements. We can refine their result in our setting with binary actions, where a pure limit equilibrium in cutoff strategies is obtained. Formally, for ν > 0, define i’s cutoff strategy at s†i ∈ S by: πi† (si )

:=

(

1 0

if si ≥ s†i . if si < s†i

Let us formulate expected payoffs when all neighbors use cutoff strategies. Given π †−i and conditional on signal realization si , i’s expected payoff from adopting is: h h i i Ui (π †−i |si ) := Eθ Es−i ui (a−i |θ) π †−i , θ si # " X = Eθ vi + σ(θ) + φ r(θ, s†j ; ν) si ,

(2)

j∈Ni

11

The assumption of a common noise structure is without loss of generality as the limit-equilibrium selection is robust to arbitrary, idiosyncratic Fi . All results in the limit hold under Gaussian ǫi (unbounded support). See Section 8.1. 12 As is standard in the global game literature, and without loss of generality, we assume agents do not carry prior information of θ. See S´akovics and Steiner (2012) for discussion.

8

where the conditional likelihood that j ∈ Ni adopts is given by:

r(θ, s†j ; ν) :=

Z

1 −1

πj† (θ + νǫj )f (ǫj )dǫj =

Expression (2) can then be written: Ui (π †−i |si ) = vi +

Z

    

F

   

1

σ(si − νǫi ) + φ −1

0

 †

if θ ≤ s†j − ν

θ−sj ν

if θ ∈ (s†j − ν, s†j + ν] .

1

if θ > s†j + ν

X

!

r(si − νǫi , s†j ; ν) f (ǫi )dǫi .

j∈Ni

(3)

(4)

Lemma 1. A Bayesian Nash Equilibrium π ∗ of G(ν) in cutoff strategies exists. We have shown that there is a unique signal s∗i ∈ (θ −ν, θ +ν) that solves: Ui (π †−i |s∗i ) = 0, with adoption optimal for i if and only if si ≥ s∗i . Furthermore, there is a unique limit equilibrium in cutoff-strategies. The next result is straightforward to obtain using Lemma 1 and Theorem 1 in Frankel et al. (2003). ~ , which is in cutProposition 1. There exists an essentially unique strategy profile π off strategies, such that any π(·; ν) surviving iterative elimination of strictly dominated ~ (·). strategies in G(ν) satisfies limν→0 π(·; ν) = π ~ of G(0) is characterized by θi∗ := limν→0 s∗i , with each The unique limit equilibrium π i choosing to [not] adopt when θ[<] > θi∗ . With Proposition 1, we are free to study ~ . Ui (π †−i |s∗i ) = 0 for each cutoff-strategy equilibria of G(ν), which must converge on π i ∈ N define the system of conditions pinning down such equilibria.

4.2

Calculating the Limit Equilibrium in General Settings

~ ∗ entails finding a consistent set of limiting exCalculating limit cutoffs θ ∗ defining π pectations, for each agent, on other agents’ adoption choices. Denote w∗ the limiting expectations placed on neighbors adopting in equilibrium π ∗ , when each agent i realizes signal si equal to her equilibrium cutoff s∗i . Precisely: wij∗ := lim Esj [πj∗ (sj )|si = s∗i ] ∈ [0, 1]. ν→0

We state the following lemma.

9

Lemma 2. For each (i, j) ∈ E, the following identity holds: ∗ wij∗ + wji = 1.

(5)

∗ wij∗ = 0, and wji = 1.

(6)

Moreover, if θi∗ < θj∗ , then To interpret (5), consider the special case when s†i = s†j = s∗ near the noiseless limit. A signal realization of si = s∗ leaves i placing a fifty-fifty gamble on j adopting. This probability weighting persists in the noiseless limit, as captured by wi∗ = wj∗ = 1/2. The fact that these limiting likelihoods sum to one holds generally, including when s∗i 6= s∗j away from the limit. For (6), when θi∗ = limν→0 s†i < limν→0 s†j = θi∗ , then indeed, agent i places diminishing likelihood on j adopting and j places diminishing likelihood on i not adopting when each realizes their respective cutoff. Now, define: W = {w = (wij , (i, j) ∈ E)|wij ≥ 0, wji ≥ 0, wij + wji = 1; ∀(i, j) ∈ E}, as the set of feasible weighting functions for G. Clearly, W is compact, convex, and isomorphic to [0, 1]e(N ) , where e(N ) is the number of links in G. Note that (5) implies w∗ ∈ W. Given the values v = (v1 , · · · , vn )′ we define the affine mapping Φ : W → Rn : Φi (w) =: vi + φ

X

wij , ∀i ∈ N.

(7)

j∈Ni

Let Φ(W) denote the image of W under the mapping Φ. Given linearity of Φ(·), Φ(W) is a compact, convex polyhedron. Denote h·, ·i the inner product in Rn and ||x − y|| := p hx, yi the Euclidean norm. The following theorem is used to calculate limiting cutoffs.

Theorem 1. For any v, φ, and network G, the equilibrium limit cutoffs θ ∗ are given by: σ(θi∗ ) + qi∗ = 0, ∀i,

(8)

where q∗ = (q1∗ , · · · , qn∗ ) is the unique solution to: q∗ = argmin ||z||.

(9)

z∈Φ(W)

Note that Theorem 1 holds for arbitrary network structure G and valuations v. The 10

solution q∗ maps one-to-one to and is monotonically decreasing with θ ∗ , as defined by (8). Strikingly, q∗ solves a simple quadratic program with linear constraints, as defined by (9). q∗ maps back to weighting matrix w∗ , via Φ(·). That is, q∗ = Φ(w∗ ). Note that (5) and (6) guarantee that q∗ satisfies the necessary condition for the minimization program (9) of Theorem 1. Even more, these conditions are also sufficient for (9). Theorem 1 can be reformulated using the tools of projection mappings. Definition 1. Let K be a closed convex set in Rn . For each x ∈ Rn , the orthogonal projection (or, projection)13 of x on the set K is the unique point y ∈ K such that: ||x − y|| ≤ ||x − z||, ∀z ∈ K. We denote ProjK [x] := y = argminz∈K ||x − z||. Observe that the vector q∗ is a projection of the origin onto the compact, convex space Φ(W), which is the image of W under the mapping Φ: q∗ = ProjΦ(W) [0], P for 0 the vector of zeros in Rn . Denoting T := i∈N Φi (w), and 1 the unit vector in P Rn ,14 observe also that, since the set Φ(W) lies on the hyperplane H = {x ∈ Rn , i xi = P T i vi + φe(N ) = T }, which includes the diagonal vector n 1, it does not matter which vector one chooses in the projection provided it is a scaling of 1 (i.e. it lies on the diagonal). In particular, q∗ is equivalent to the projection of Tn 1 onto the convex set Φ(W), with q∗ = Tn 1 when Tn 1 ∈ Φ(W).15 The following example illustrates the unique projection q∗ for the dyad network. Example 1. For dyad with agents 1 and 2, W = {w, 1 − w : w ∈ [0, 1]}, where w12 = w and w21 = 1 − w, and Φ(W) = {v1 + φw, v2 + φ(1 − w) : w ∈ [0, 1]}. Figure 1 depicts three cases: (a) v1 − v2 < −φ, (b) φ ≥ v1 − v2 ≥ −φ, and (c) v1 − v2 > φ. When the value gap |v1 − v2 | > φ in cases (a) and (c), the projection q∗ obtains a corner of Φ(W). Precisely, q1∗ < q2∗ and w = 1 in case (a), and q1∗ > q2∗ and w = 0 in case (c). In case (b), Φ(W) intersects the diagonal, and thus q1∗ = q2∗ , with w ∈ (0, 1) when φ > v1 − v2 > −φ. 13

See Chapter 1 of Nagurney and properties of this projection operator. P (1992) for characterization P Clearly, for any w ∈ W, i∈N Φi (w) = i∈N vi + φe(N ). 15 The mapping Φ(·) may not be injective. As the dimension of W is e(N ), the image always lies on the hyperplane H, so the dimension of the image is at most n − 1. 14

11

q2∗ T 2

q2∗

Φ(W) b

(c) v1 − v2 > φ.

(b) φ ≥ v1 − v2 ≥ −φ.

(a) v1 − v2 < −φ.

q2∗

Φ(W)

b

(v1 , v2 )

T 2

q∗

T 2 b

(v1 , v2 )

b

b

q∗

q∗

Φ(W) b

(v1 , v2 ) T 2

q1∗

T 2

q1∗

T 2

q1∗

Figure 1: The vector q∗ (green arrow) as the projection of the diagonal (gray arrow) onto Φ(W) (blue line segment) for the dyad network. Example 1 shows that q1∗ = q2∗ , and thus θ1∗ = θ2∗ , for a range of value gaps |v1 −v2 | ≤ φ. Provided a sufficient extent of symmetry holds in the limit game G(0), the two agents will take a common cutoff, adopting exactly when the other adopts. Also illustrated with the dyad example, when value gap |v1 − v2 | > φ agent i, taking higher limit cutoff places limiting likelihood wij∗ = 1 on j 6= i adopting when i observes θ = θi∗ > θj∗ . Conversely, j ∗ places limiting likelihood wji = 0 on i adopting when j observes θ = θj∗ . The following notion of a coordination set will account for both coordination and miss-coordination in general network structures. For agent subset X ⊆ N , denote EX the subset of edges in E corresponding with ~ the subgraph GX := (X, EX ) of G restricted to vertices X.16 The limit equilibrium π ∗ ∗ must then define an ordered partition C ∗ := (C1∗ , . . . Cm ¯ ∗ ) of N (i.e. ∪m Cm = N and ∗ ∗ Cm ∩ Cm 6 m′ ) with the following properties: ′ = ∅ for m =

~ maps to an ordered partition Definition 2 (Limit partition). The limit equilibrium π ∗ C ∗ := (C1∗ , . . . Cm ¯ ∗ ) of N satisfying: ∗ ∗ ∗ ∗ ∗ ∗ 1. For each m, Cm 7→ θm ∈ Θ with θi∗ = θj∗ = θm for each i, j ∈ Cm , and θm ≤ θm ′ for each m < m′ .

2. For each m, GCm∗ is connected. ∗ ∗ ∗ ∪C ∗ 3. For each m 6= m′ such that θm = θm = ECm∗ ∪ ECm∗ ′ . ′ , E Cm m′ ∗ Each Cm defines a coordination set of agents. By condition 1, each agent within a 16

Precisely, (i, j) ∈ EX if and only if i, j ∈ X and (i, j) ∈ E.

12

coordination set shares the same cutoff, which we are free to order when defining C ∗ .17 By condition 2, these agents are connected via paths within their coordination set. And by condition 3, coordination sets sharing the same cutoff are disconnected. Importantly, the grouping of agents according to Definition 2 is without loss of generality, as the exhaustive partition (i.e. C = {{i}; i ∈ N }) satisfies conditions 1, 2 and 3, characterizing (non)coordination when all agents take distinct cutoffs. When convenient, m(i) will ∗ denote i’s coordination set: i ∈ Cm(i) . ∗ The next proposition provides a partial characterization of when a set of agents Cm indeed coordinate together. The result takes as given the coordination by all others ∗ agents N \Cm on higher or lower cutoffs. Let di (X) := |Ni ∩ X| denote the within-degree of i in agent set X ⊆ N . For any agent sets X and Y , X ∩ Y = ∅, we denote: e(X, Y ) =

X

di (Y ),

i∈X

the number of edges from X to Y .18 And for any X ⊆ N , we denote: e(X) =

1X di (X), 2 i∈X

P the number of edges between members of X, and v(X) := i∈X vi . Finally, for each ∗ ∗ ∗ ∗ ¯∗ Cm ∈ C ∗ we denote the set of agents Cm := ∪m′ m Cm′ . ¯ ∗ ∗ Proposition 2 (Common coordination). Conditional on Cm adopting and C¯m not adopt¯ ∗ ∗ ∗ ing with probability one, connected agent-set Cm = N \(Cm ∪ C¯m ) coordinate together if ¯ ∗ and only if for every nonempty X ⊂ Cm : ∗ ∗ ∗ ∗ ∗ v(Cm ) + φ(e(Cm , Cm ) + e(Cm )) v(X) + φ(e(X, Cm ) + e(X)) ¯ ¯ ≤ . ∗| |X| |Cm

(10)

∗ Under this condition, the common cutoff among members of Cm is given by:

∗ θm = σ −1 (−

∗ ∗ ∗ ∗ v(Cm ) + φ(e(Cm , Cm ) + e(Cm )) ¯ ). ∗ |Cm |

(11)

∗ ∗ The condition (10) must hold for all subsets of Cm . That is, a violation by some X ⊂ Cm ∗ implies that X carries a strictly greater incentive for adoption than all others in Cm 17

Condition 1 of Definition 2 pins only a partial ordering of {C1 , . . . , Cm∗ ¯ }, and thus there can be multiple orderings satisfying the conditions. 18 Note that e(X, Y ) = e(Y, X) by E undirected.

13

∗ ∗ when they take a higher limit cutoff.19 Equivalent to (11), qm := −σ(θm ) gives exactly ∗ the average (across i ∈ Cm ) of vi , plus φ times the average number of links to agents ∗ ). This taking strictly lower cutoffs, plus φ times one-half the average within-degree di (Cm provides a calculation of θ ∗ solely in terms of counting degrees amongst members of a coordination set. Strikingly, Proposition 2 shows that, while G plays a key rule in determining the limit partition C ∗ , upon conditioning on C ∗ the network structure within coordination ∗ ∗ ∗ sets plays no role in determining limiting cutoffs. Precisely, given v(Cm ), e(Cm , Cm ), and ¯ ∗ ∗ ∗ e(Cm ), moving the position of links within Cm carries no impact on θm . In other words, while the structure of G plays a global role determining who coordinates with whom, its role is muted at the local level. To close the section, we provide an algorithmic approach for calculating limiting coordination sets C ∗ . The construction of the algorithm is motivated by Proposition 2. With each iteration, an additional limit cutoff is picked-off, starting with θ1∗ .

Algorithm 1 (Combinatorial derivation of coordination sets). For disjoint agents sets X, A ⊆ N , X 6= ∅, define the function: ψ(X|A) :=

v(X) + φ(e(X, A) + e(X)) . |X|

Define A0 := ∅. Step k = 1, . . . of the algorithm is defined as follows: Step k. For A ⊂ N , define Λ(A) := argmax∅6=X⊆N \A ψ(X|A). Solve: [

Bk =

X.

X∈Λ(Ak−1 ) p(k)

Partition Bk into disjoint, connected subsets {Bk1 , . . . , Bk 1 ≤ q < q ′ ≤ p(k). Set Ak = Bk ∪ Ak−1 . p(1)

Continue until Ak = N . Then {{B11 , . . . , B1

}: EB q ∪B q′ = EBkq ∪ EB q′ , k

p(2)

}, {B21 , . . . , B2

k

k

}, . . .} gives C ∗ .

The following establishes the relationship between Algorithm 1 and Theorem 1. Proposition 3 (Duality). For each step k of Algorithm 1, Bk is itself a solution to max∅6=X⊆N \Ak−1 ψ(X|Ak−1 ), with maxi∈N \Ak−1 qi∗ = ψ(Bk |Ak−1 ). 19

This gives necessity; sufficiency is shown in the proof provided in the Appendix.

14

The proposition shows that each step of Algorithm 1 effectively searches for the maximal set of agents, among all agents left over from prior steps, which yields the greatest collective-average in intrinsic values plus limiting expected network effects. Weights placed on agents taking strictly lower cutoffs (found in earlier steps of the algorithm) are set to one, while the sum of expected weights placed on other members aggregate to the number of links between members (inline with Lemma 2 and Proposition 2). Theorem 1 and Algorithm 1 can now be viewed as dual problems. The former calculates q∗ yielding the partition C ∗ as a bi-product, while the latter constructs C ∗ yielding q∗ as a bi-product. Interestingly, Theorem 1 gives the weights wij∗ explicitly in the projection step. Alternatively, in the Algorithm 1, these weights are set either to 0 or 1 for agents in different coordination sets by construction, while they are implicitly implied by Gale’s Demand Theorem for agents residing within the same coordination set.

5

Characterizations under Homogeneous Valuations

Throughout this section, we assume that vi = v for each i; by imposing such homogeneity, the structure of G solely determines the limiting coordination amongst agents. As suggested by Proposition 2, the limit partition defines an essential instrument for ~ . The first result of the section, which is a corollary of Thedescribing the properties of π orem 1, establishes two basic properties of this partition under homogeneous valuations. ˆ ∗ to give the q∗ at v = 0 and φ = 1. Denote q Corollary 1 (Limit partition homogeneity). Under homogeneous valuations, C ∗ is independent of v and of φ. Moreover, q∗ = v1 + φˆ q∗ . Scaling the size of valuations or network effects has no effects on the limit partition. Moreover, q∗ is linearly augmented by the size of values v and of network effects φ. The following example applies Proposition 2 to the star and simple core-periphery networks. Example 2. Figure 2 gives the star and three core-periphery networks of differing core sizes. In each case we apply Proposition 2, focusing on agent sets which are symmetric over their respective included agents. For these cases, the relevant e(X, Y ) reduce to di (Y ) ˆ ∗ .20 and e(X) to di (X) for each i ∈ X. We set v = 0 and φ = 1, giving q∗ = q 20

Given independence of C ∗ in v1 and φ by Corollary 1, this is without significant loss of generality.

15

(a) Star network.

(b) Triad-core-periphery network.

1p

1p

1c c 3c 3p

2p

2c

3p

(c) Quad-core-periphery network.

2p

(d) Large core-periphery network.

r 4p

1p

2q

1p 6c

4c

1c

1c

1q

2p 5c

3c

2c 3p

2c 4c

3p

3c

2p

4p

Figure 2: Coordination and network structure. For the star, if multiple coordination sets were to exist, the most natural case is for the center to take a strictly lower cutoff to the periphery. Setting agent set X = {c} and ∗ ∗ Cm = C¯m = ∅ in Proposition 2, we see that (10) is satisfied with: ¯ e({c}) 0+3 e(N, ∅) + e(N ) = dc (∅) = 0 < = , |{c}| 4 |N | which implies the center can not have a strictly lower limit cutoff to the periphery. Upon validating (10) for all other X, we establish that all members of the star coordinates on a common cutoff. Note that the analogous inequalities to the above hold for arbitrary

16

number of peripheral agents, implying that all agents of star networks coordinate together. ∗ For the triad-core-periphery network depicted, set X = {1c, 2c, 3c} (again, Cm = ¯ ∗ C¯m = ∅). (10) is now weakly satisfied: e({1c, 2c, 3c}) 0+3 0+6 e(N, ∅) + e(N ) = = = . |{1c, 2c, 3c}| 3 6 |N | That is, the core and periphery hold equivalent expected network effects when the former takes a lower cutoff. Likewise, placing the core’s cutoff above the periphery’s cutoff implies a balance in expected network effects to each agent in the network, which instead suggests that one cutoff obtains. Once the size of the core exceeds three, as with the quad-core-periphery network, the expected network effects within the core suffice for it to break away from the periphery. We violate (10) by setting X = C1∗ = {1c, . . . , 4c}: 0+6 e(C1∗ , ∅) + e(C1∗ ) > e({jp}, C1∗ ) + e({jp}) = 1 + 0, = ∗ |C1 | 4 for each j = 1, . . . , 4, and thus each periphery node is in its own coordination set after C1∗ . For the Large core-periphery network, we can likewise show C1∗ = {1c, . . . , 6c}, C2∗ = {r}, C3∗ = {1q, 2q}, leaving each periphery agent jp, j = 1, . . . , 4 to inhabit their own coordination sets C4∗ , . . . , C7∗ . We may also apply Algorithm 1, which yields Bk = Ck∗ for ∗ k = 1, 2, 3, and B4 = ∪m=4,...,7 Cm . Note that the number of peripheral cliques connecting to the core, each taking a local structures depicted in Figure 2, is inconsequential to the equilibrium cutoff of the core. To illustrate these results, we provide q∗ from (9) of Theorem 1, for each network ∗ structure. We obtain the same coordination derived above. In the star, wic = 3/4 and ∗ ∗ ∗ wci = 1/4 for each peripheral node i. In the other three networks, wic = 1 and wci =0 for any peripheral agent i and core agent c (see Figure 3). ∗ ∗ By setting Cm = C¯m = ∅ in Proposition 2, we obtain a necessary and sufficient ¯ condition for a single coordination set in the network.

Proposition 4 (Single coordination set). Under homogeneous valuations, a single coordination set exists (i.e. C ∗ = {C1 }) if and only if it is balanced, in the sense that for every nonempty X ⊂ N , e(X) e(N ) ≤ . (12) |X| |N | 17

2.5

2

qi∗ 1.5

1

0.5

all agents all agents Star Triad-core-per.

core periphery Quad-core-per.

core

r 1q,2q 1p,...,4p Large core-per.

Figure 3: Coordination and network structure. Limit weighted-network-effects. ) ). When satisfied, the common cutoff in the network is θ1∗ = σ −1 (−v − φ e(N |N |

Condition (12) says that the average degree of each subnetwork GX is no greater than the average degree of the original network G. Equivalently: P

i,j∈X

|X|

gij

≤

P

i,j∈N

gij

|N |

, ∀ ∅ 6= X ⊂ N

Returning to and extending beyond Example 2, consider any core-periphery structure with regular core of degree dc and size nc , and with np periphery nodes, each connected to k core nodes symmetrically. This graph is balanced if and only if dc ≤ 2k. Either the core is not very connected, or the number of links to the core is very large. Otherwise the periphery node will have a strictly higher cutoff than the core nodes. We apply Proposition 4 to show a unique coordination set for the following families of network structures. We say network G is regular if d := di for all i. A tree is any connected network without cycles. We say network G is regular-bipartite with disjoint agent sets X1 and X2 , X1 ∪ X2 = N , of sizes nside := |Xside | for sides side = 1, 2, when agents within each side share common degrees and within-degrees: dside := di and din side := di (Xside ) for all i ∈ Xside . Note that regular-bipartite networks satisfy e(N ) = n1 d1 = n2 d2 .

18

Proposition 5 (Single coordination set: examples). Under homogeneous valuations, there exists a single coordination set if G: 1. is a regular network, or 2. is a tree network, or 3. is a regular-bipartite network, or 4. has a unique cycle, or 5. has at most four nodes. Proposition 5 exhibits the striking extent to which global coordination may obtain. Members of all trees, regardless of their size and complexity, adopt using a common limit cutoff. Parts 2 and 4 establish the existence of at least two distinct cycles in G as a necessary condition for multiple limit cutoffs to obtain in equilibrium. This establishes trees as the family of network structures exhibiting the highest limit cutoffs. The triadcore-periphery network of Example 2 provides an example of a network with one cycle, illustrating Proposition 5, part 4. Still, regular-bipartite networks (and regular networks) may carry arbitrary numbers of cycles, yet all of these structures yield a unique coordination set. ∗ Proposition 2 provides an exact calculation of each θm as a function of average degrees ∗ across all members of Cm . The following result provides bounds on limit cutoffs using only the minimal degree within a given agent set. Denote qdr∗ := v +φd/2 and θdr∗ := σ −1 (−qdr∗ ) for any regular network of degree d. Proposition 6 (bounding limit cutoffs). 1. For each agent set X ⊆ N , maxi∈X θi∗ ≤ θdr∗ , setting d = mini∈X di (X). ∗ ∗ ∗ ∗ r∗ , setting d = mini∈Cm∗ di (Cm ∪ Cm ). 2. For each coordination set Cm ∈ C ∗ , θm ≥ θ2d ¯

To illustrate Proposition 6, we return to Example 2 under v = 0, φ = 1 to yield qdr∗ = d/2. As observed in Figure 3, and consistent with part 1 of the proposition, the star and triad-core-periphery networks exhibit a common q1∗ positioned weakly above those of the dyad and triad, q1r∗ = 0.5 and q2r∗ = 1, respectively. Likewise, the cores of the quad and large core-periphery networks exhibit q1∗ positioned weakly above q3r∗ = 1.5 and 19

q5r∗ = 2.5, respectively. For part 2, the peripheral agents of the star and triad-coreperiphery networks carry one link within their coordination sets. All members of these networks exhibit q1∗ at or below q2r∗ . The following applies Propositions 2 and 6 to tree and regular-bipartite networks. Remark 1 (Bounding limit cutoffs: trees and regular-bipartite networks). 1. For any tree network, θ1r∗ ≥ θ1∗ = σ −1 (−(v + φ |N|N|−1 )) ≥ θ2r∗ . | ) r∗ )) ≥ θ2r∗min{d1 ,d2 } . 2. For any regular-bipartite network, θmin{d ≥ θ1∗ = σ −1 (−(v+φ ne(N 1 ,d2 } 1 +n2

We see that the limit cutoffs of the dyad and triad bound any tree’s limit cutoff from above and below. The common limit cutoff of any regular-bipartite network can also be bounded, both above and below, now by the degree of the network’s less-connected side. The above results take non-singleton coordination sets as cases of interest. The following shows that under homogeneous valuations, C ∗ must always exhibit such coordination. Proposition 7. For homogeneous valuations and any G, there exists at least one coordination set with size at least 2. In particular, it is impossible to have n distinct cutoffs. The final results of this section establish our first comparative static, which is with respect to the network structure G. Consider network G+ij , defined as the supergraph of ∗ G which includes the additional link ij, and C+ij the limit partition under G+ij . While adding links can affect the limit partition, Proposition 2 can be employed to verify when ∗ the limiting coordination is left unchanged: for C+ij = C ∗ . For these cases, Proposition 8 establishes a disparity in the effects of included links on equilibrium cutoffs. While additional links unambiguously encourage adoption amongst agents taking higher cutoffs, the equilibrium adoption of the agent taking a lower cutoff may not be influenced by the additional link. For the following, and in the sequel, we focus on changes to q∗ , ∗ again noting the one-to-one correspondence with θ ∗ via (8). Let qm,+ij correspond to ∗ coordination set Cm under network G+ij . Proposition 8 (linkage: limit cutoffs). Take i, j with m(i) ≥ m(j), ij ∈ / E, such that ∗ ∗ C+ij = C . If: ∗ ∗ 1. θm(i) > θm(j) , then:

∗ ∗ qm(i),+ij − qm(i) =φ

1 ∗ |Cm(i) |

,

and

20

∗ ∗ qm(j),+ij − qm(j) = 0;

2. m(i) = m(j) =: m, then: ∗ ∗ qm,+ij − qm =φ

1 ∗ |Cm(i) |

.

The inclusion of links between members of distinct coordination sets will expand adoption outcomes within the coordination set taking higher cutoff, but carry zero influence on adoption within the coordination set taking lower cutoff. While the inclusion of links between members of the same coordination set directly influences the two members’ incentives to adopt, the expansion in adoption outcomes within the coordination set is comparable to that resulting from a single link to an agent taking a lower cutoff. Example 3. Consider network structures of the form depicted in Figure 4, under the symmetric conditions vi = v for each i ∈ N . Agents 1 through 5 and 7 through 10 form cliques, with agent 6 bridging the two cliques with varying connectivity to each clique. We denote ℓ1 the number of links that 6 has with agents in {1, . . . , 5}, and ℓ2 the number of links that 6 has with agents in {7, . . . , 10}. Table 1 summarizes the equilibrium ˆ ∗ from Theorem 1 for various values of (ℓ1 , ℓ2 ). coordination sets, and provides q 5 1

ℓ1

ℓ2

1

1

10

7

2

9

8

4

6 2

2

3

Figure 4: Coordination and bridging.

21

C∗

ˆ∗ q

{{1, . . . , 5}, {7, . . . , 10}, {6}}

(2, 1.5, 0) (2, 1.5, 1) (2, 1.5, 1)

(1, 1) (0, 2) (1, 2)

{{1, . . . , 5}, {6, . . . , 10}}

(2, 1.6) (2, 1.6) (2, 1.8)

(2, 0) (2, 1)

{{1, . . . , 6}, {7, . . . , 10}}

(2, 1.5) (2, 1.75)

(2, 2)

{N }

(2)

(ℓ1 , ℓ2 ) (0, 0) (0, 1) (1, 0)

ˆ ∗ for agent 6 linkage. Table 1: Coordination sets C ∗ and q As agent 6 forms two links with each of the two cliques, all of the agents coordinate together on a common cutoff in the noiseless limit. While the total number of links that 6 carries with each clique lies strictly below that of the members of each respective clique, 6 functions as a coordination bridge, synchronizing adoption strategies through the economy. When the number of links to either clique drops below two, 6 either coordinates with one of the two cliques, or coordinates with neither when holding only one link. We see that forming one link with either clique increases qˆ6∗ by exactly 1 = 1/|{6}|, while having no impact on cutoffs of the clique, as predicted by Proposition 8 part 1.21 When agent 6 holds one link with clique {7, . . . , 10} and adds an additional link to the clique, we see an increase in qˆi∗ , i = 6, . . . , 10, of 0.2 = 1/|{6, . . . , 10}|, that is from 1.6 to 1.8, as predicted by Proposition 8 part 2.

5.1

Coordination in real-world networks

Here we explore our model’s prediction in four examples of small real-world networks. We consider three components from the “help decision” network22 in rural India studied in Banerjee et al. (2013), and the friendship network of adolescents in the United States sourced from the Add Health data set. Figure 5 depicts coordination in each of these networks. In each network, vi is set to zero for each i and φ = 1. Each coordination set’s 21

Likewise, if agent 6 holds two links with clique {1, . . . , 5} and adds a link to clique {7, . . . , 10}, we see an increase in qˆi∗ , i = 7, . . . , 10 of 0.25 = 1/|{7, . . . , 10}|, specifically from 1.5 to 1.75, as predicted by Proposition 8, part 1. 22 The exact question is: “If you had to make a difficult personal decision, whom would you ask for advice?”.

22

∗ qm (from Theorem 1) is provided with each figure and different colors indicate different coordination sets. We see that multiple coordination sets can obtain in small networks. For example, with the Banerjee et al. (2013) data, in network 2, there are six coordination sets from only twenty agents in total. Applying Algorithm 1 to this network, step two will find B2 = C2∗ ∪C3∗ (red and blue agents), with each subsequent step k > 2 finding coordination set k + 1, and the algorithm terminating after step five. Noting the presence of one cycle in the Add Health network, which implies that agents coordinate on a common cutoff (see Proposition 5). Applying (11) of Proposition 2, in this network, an equilibrium q1∗ = 1 obtains given that the number of links is equal to the number of agents. Upon deleting ) one link within the cycle, global coordination would persist with q1∗ dropping to e(N = 22 . |N | 23

(b) Banerjee et al. (2013) network 2

(a) Banerjee et al. (2013) network 1

q3∗ = 2.5

q5∗ = 1.33 q1∗ = 4

q2∗ = 2.5

q6∗ = 1

q2∗ = 1.66 q3∗ = 1.5 (c) Banerjee et al. (2013) network 3

q1∗ = 3

q4∗ = 2

(d) Add Health friendship network

q1∗ = 2.5

q4∗ = 1.75 q2∗ = 2 q3∗ = 1.875

q1∗ = 1

Figure 5: Coordination in real-world networks. 23

6

Characterizations under Heterogeneous Valuations

In what follows, we allow for heterogeneous vi . The results therefore apply under our general framework. First, there exists an analogous condition characterizing global coorP dination on a common cutoff. Again, v(X) := i∈X vi for X ⊆ N .

Remark 2. Under heterogeneous valuations, a single coordination set exists (i.e. C ∗ = {C1 }) if and only if for every nonempty X ⊂ N , v(X) + φe(X) v(N ) + φe(N ) ≤ . |X| |N |

(13)

) ). Condition When this condition is satisfied, the common cutoff is θ1∗ = σ −1 (− v(N )+φe(N |N | (13), holding for all ∅ 6= X ⊂ N , gives the extension of network balance to heterogeneous valuations. Moreover, we see that Algorithm 1 terminates in one step if and only if there exists a unique coordination set. That is, when N is the maximizer of ψ(·|∅):

ψ(X|∅) ≤ ψ(N |∅), ∀ ∅ 6= X ⊂ N. In other words, v(X) + φe(X) v(N ) + φe(N ) ≤ , ∀ ∅ 6= X ⊂ N, |X| |N | which is exactly the condition identified in equation (13). Proposition 8 also extends to heterogeneous valuations when additional links do not affect the limit partition. ∗ Remark 3. Under heterogeneous valuations, if C+ij = C ∗ for i, j with m(i) ≥ m(j), ij ∈ / E, then Proposition 8 obtains.

The next result shows that as network effects strengthen with an increase in φ, the range of intrinsic values that support coordination amongst agents expands. This characterizes a stickiness in coordination as a result of network effects. Maintaining the above ∗ ∗ assumptions for G, take v such that all i ∈ Cm ∈ C ∗ coordinate on common θm cutoff in ∗ ~ . For each i ∈ Cm the limit equilibrium π denote: ∗ vˆi∗ := argmax{vi : θi∗ = θj∗ , j ∈ Cm \{i}; v−i }, ∗ vi∗ := argmin{vi : θi∗ = θj∗ , j ∈ Cm \{i}; v−i }. ˇ

24

That is, [vi∗ , vˆi∗ ] gives the ranges to i’s intrinsic values that support i and members of ˇ ∗ ∗ Cm \{i} (for at least one j ∈ Cm \{i}) coordinating on the same limiting adoption cutoff.23 ∗ ∗ When Cm \{i} coordinate on a common cutoff θm for vi ∈ (ˆ vi∗ , vi∗ ), then vˆi∗ = argmax{vi : ˇ ∗ ∗ θi∗ = θm ; v−i } and vi∗ := argmin{vi : θi∗ = θm ; v−i }.24 We can bound vˆi∗ − vi∗ in the ˇ ˇ noiseless limit. ∗ Proposition 9 (sticky coordination and network effects). Take coordination set Cm ∈ C∗ ∗ ∗ with |Cm | > 1. Then for each i ∈ Cm : ∗ vˆi∗ − vi∗ ≥ φdi (Cm ). ˇ

(14)

When C ∗ is constant for vi ∈ (ˆ vi∗ , vi∗ ), then: ˇ |C ∗ | ∗ vˆi∗ − vi∗ = ∗ m φdi (Cm ). |Cm | − 1 ˇ

(15)

Expression (14) with φ > 0 establish that vˆi∗ − vi∗ is strictly positive. Moreover, coordinaˇ ∗ tion amongst agents in Cm becomes more robust as network effects grow, with the lower ∗ ∗ bound to vˆi∗ − vi∗ proportional to i’s degree within Cm , di (Cm ). When C ∗ is constant for ˇ ∗ vi ∈ (ˆ vi∗ , vi∗ ), then vˆi∗ − vi∗ is linearly increasing in di (Cm ). As with the dyad in Example ˇ ˇ 1, regular networks of n agents with vj = v, ∀j 6= i give vˆi∗ − vi∗ = nφ. ˇ ∗ To interpret (14) and φdi (Cm ) as an underlining lower bound to vˆi∗ − vi∗ , consider the ˇ analogues to vˆi∗ and vˆi∗ near the limit: ∗ \{i}; v−i }, vˆi∗ (ν) := argmax{vi : |θi∗ − θj∗ | < 2ν, j ∈ Cm ∗ vi∗ (ν) := argmin{vi : |θi∗ − θj∗ | < 2ν, j ∈ Cm \{i}; v−i }, ˇ

which obtain limν→0 vˆi∗ (ν) = vˆi∗ and limν→0 vi∗ (ν) = vi∗ . When vi = vˆi∗ (ν) in the perturbed ˇ ˇ ∗ game G(ν), s∗i < s∗j for each j ∈ Ni ∩ Cm , and thus the likelihoods that i and j place on the other adopting –when realizing signals equal to their respective equilibrium cutoffs– equal zero and one, respectively. When vi = vi∗ (ν), then s∗i > s∗j , and the likelihoods that ˇ i and j place on the other adopting –realizing signals equal to equilibrium cutoffs– revert to equal one and zero. The difference in vˆi∗ and vi∗ compensates i’s adoption, accounting ˇ ∗ for these extremal probability weightings placed on i’s neighbors in Cm adopting. Existence of vˆi∗ and vi∗ follow from existence of their counterparts near the noiseless limit, which ˇ obtain by continuity of equilibrium cutoffs in all parameters for each ν > 0. 24 The star in Example 4 below satisfies this property. The property can be violated when i is a bridge between two cliques, and with i = 6 in Example 3. 23

25

We next show that changes in intrinsic values to one agent reverberate through that agent’s entire coordination set, with each member adjusting their cutoffs in step. Proposition 10 (local contagion: intrinsic values). In the limit, the mapping q∗ (v) is ∗ exists. Generipiecewise linear, Lipschitz continuous, and monotone. Generically, ∂q ∂v cally, when i, j ∈ Cm and k ∈ / Cm , then: ∂qj∗ 1 , = ∂vi |Cm |

and

∂qk∗ = 0. ∂vi

(16)

A change in the intrinsic value of the technology to agent i has a local effect on the ∗ adoption strategies of agents that coordinate with i in Cm , but has zero influence on adoption strategies in other coordination sets. The intuition is straight forward: while ∗ vi carries influence on cutoffs within agents in Cm , when signals si′ ≈ s∗i′ are realized the ∗ members of Cm are either all adopting or all not adopting the technology, depending on ′ m < m or m > m′ , respectively. Thus, marginal changes to vi , and in turn s∗i , carry zero ∗ repercussions to coordination within Cm ′. ∗ ∂qj ∂s∗ The fact that ∂vi > 0 from (16) implies that ∂vji < 0 near the limit, by equilibrium cutoffs s∗ continuously differentiable in v and in ν. Moreover, we can show that the discontinuous drop-to-zero in contagion across coordination sets persists near the limit. Remark 4. Near the limit, for k ∈ / Cm(i) ,

∂s∗k ∂vi

= 0 when ν < ν¯ for some ν¯ > 0.

The proof of Remark 4 is provided in the Appendix. The following example illustrates Proposition 10, both near and in the noiseless limit. Example 4. Take the star network with four nodes of Figure 2, Example 2. We take equivalent specifications, but set vi = 1 for i 6= 1p, and vary the intrinsic value from adopting of the peripheral node 1, v1p , over [0.5, 2.5]. We assume the following specification:25 1−θ X ui (a−i |θ) = vi − 3 + aj . (17) θ j∈N i

We consider uniform noise F (ǫ) = (ǫ + 1)/2, for ν = .005. Figure 6 plots each agent’s ∗ equilibrium adoption cutoff, both near and in the limit.26 For values of v1p below v1p = ˇ ∗ 0.67, agent 1p lies outside of the coordination set {c, 2p, 3p}. As v1p rises above v1p , ˇ increases in v1p spillover to the other agents’ adoption strategies, with agents’ adjustment 25 26

Note that θ, θ ∈ (0, 1) obtain for all vi , φ > 0. Equilibria near the limit were calculated via fixed-point method; see online Appendix C.

26

0.68

s∗2p , s∗3p s∗c s∗1p ∗ ∗ θ2p , θ3p , θc∗ ∗ θ1p

2ν

0.64

s∗i , θi∗ 0.6

2ν

0.56

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2.2

2.4

v1p

Figure 6: Intrinsic values and local contagion: equilibrium cutoffs, near the limit (solid lines) and in the limit (dashed lines), versus v1p in the star network. ∗ rates inversely proportional to their distances from 1p. When v1p rises above vˆ1p = 2, 1p takes a cutoff strictly below that of the remaining three agents. One can verify from ∗ ∗ Figure 6 that all agents coordinate together for each v1p ∈ (v1p , vˆ1p ). As predicted by ˇ 4 Proposition 10, vˆi∗ − vi∗ = 4−1 (0 + 1) = 1.33. ˇ

The above results establish a stark segmentation across coordination sets. This segmentation, characterized by Proposition 8 (upon adding links) and Proposition 10 (upon adjusting intrinsic values), obtains both in and near the noiseless limit. The next section explores the welfare implications of equilibrium coordination on networks.

7

Welfare and Policy Implications

Proposition 9 reveals an increased robustness in coordination amongst agents to perturbations to intrinsic values as network effects strengthen. Proposition 10 establishes a discontinuity in effects of such perturbations, with agents outside of the perturbed agent’s coordination set remaining unresponsive in equilibrium. The questions remain to any planner: what marginal benefit is realized with adoption subsidies, and which agents’ adoption should be subsidized? To address these questions, we first develop our welfare analysis near the limit, then quantify the relevant welfare measures as ν → 0. Consider a policy designer with either 27

of the following two objectives. In either case, the designer places Pareto weight λi ≥ 0 on each agent i ∈ N . First, a designer may aim to maximize the λ-weighted aggregate ex-ante adoption likelihood. Precisely, such a designer realizes a marginal increase to this likelihood from increasing vi of: ma∗i (λ)

′

:= λ Es



 X Z ∞ Z ∞ X ∂ † ∂ ∂ ν→0 λj π = dS(sj ) −−→ dH(θ). λj ∂vi ∂vi s∗j ∂vi θj∗ j∈N j∈N

with ′ denoting the transpose operator, S(·) denoting the marginal cdf of signal realizations, and H(·) the (prior) cdf of θ. Alternatively, a benevolent planner may aim to maximize the λ-weighted ex-ante welfare across agents. This benevolent planner realizes a marginal gain from increasing vi of: mwi∗ (λ)

 X Z ∞ ∂ ∂ † [Ui (π −i |si )] = λj Uj (π †−j |sj )dS(sj ) := λ Es ∂vi ∂vi s∗j j∈N   Z ∞ X X ∂ ν→0 vj + φ lim Esk [πk∗ (sk )|sj ] dH(θ). −−→ λj ν→0 ∂v i θj∗ j∈N k∈N ′



j

By setting λ = 1 we can quantify the aggregate (utilitarian) affects of adoption and welfare based policies. The following obtains. ∗ ∗ Proposition 11 (policy impact). For each Cm ∈ C ∗ and i ∈ Cm :

1. lim ma∗i (1) =

ν→0

2. lim

ν→0

mwi∗ (1)

= (1 −

∗ H(θm ))

+φ



∗ H ′ (θm ) , ∗ ) σ ′ (θm

∗ ∗ ∗ e(Cm , Cm ) + e(Cm ) ¯ ∗ |Cm |

(18) 

∗ H ′ (θm ) . ∗ ) σ ′ (θm

(19)

First, note that expressions (18) and (19) both reduce to functions of coordination-setlevel variables. That is, in the noiseless limit, any targeted policy’s aggregate impact, on both adoption and ex ante welfare over the network, is left independent of the particular ∗ choice of target i ∈ Cm . Optimal policy design becomes a problem of targeting a given coordination-set rather than a particular agent. Expressions (18) can be interpreted as follows. A subsidy to i’s adoption increases ∗ adoption amongst Cm , while carrying zero influence amongst members of other coordina∗ tion sets. The effect on the adoption of each member in Cm is inversely propositional to ∗ |Cm | by Proposition 10. Therefore, the aggregate marginal effect of these adoption-based 28

∗ policies is left only a function of the targeted coordination set Cm through the steepness ∗ of H and σ at θm . To interpret expression (19), subsidies to adoption generate positive welfare gains to coordination sets that may not contain the target i. Precisely, provided an agent j ∗ ∗ ∗ either (i) is in Cm , or (ii) takes cutoff θj∗ < θm and is directly connected to Cm , j then ∗ realizes additional adoption value in all states in which Cm and j begin to adopt. The ∗ aggregate marginal welfare is now decreasing in θm through the direct effect on target ∗ i’s ex-ante welfare, quantified by (1 − H(θm )). Moreover, positive externalities borne by ∗ other members of Cm andby connected agents in lower coordination sets further augment  ∗ ,C ∗ )+e(C ∗ ) ∗ e(C ∗ m m m m) ¯ ∗ mwi∗ (1). Substituting φ = −σ(θm ) − v(C into (19), we see that the ∗ | |Cm | |Cm benevolent planner will broadly target low coordination sets (any member of which), ∗ m) but will penalize coordination sets when exhibiting high average valuation v(C ∗ | . This |Cm is precisely because these coordination sets realize high incentive for adoption without providing adequate network externalities to agents taking lower cutoffs.

8 8.1

Extensions and Applications Extensions and variations

The following extensions of the model are offered. The first two extensions establish that the unique equilibrium selection is broadly robust to the properties of the noise technology of the perturbed game. The subsequent extension and variation of the model, addressing welfare spillovers and miss-coordination costs (respectively), address the potential for additional/alternative externalities, either non-strategic (in the former) or strategic (in the latter). Unbounded noise The above model takes agents’ noise supports to be contained within the bounded interval [−ν, ν].27 The positive and normative implications of the model maintain in the noiseless limit under unbounded noise. Consider, for example, the perturbed game where θ is 27

This assumption conveniently yields equilibrium properties near the noiseless limit which are com~ . In particular, local contagion (Remark 4) and the reach of policy mensurate with the properties of π interventions (Proposition 11) extend but remain contained within coordination sets, provided ν is sufficiently small.

29

observed with Gaussian noise by all agents: each i observes signal si = θ + ǫi , where each ǫi ∼ N (0, ν), ν > 0, and all signals independently drawn conditional on θ. The program ~ .28 Therefore, all limiting of Theorem 1 continues to describe the limit equilibrium π characterizations, including those of sticky coordination, linkage, and local contagion, as well as the model’s welfare properties are intrinsic to the equilibrium selected from the complete information game G(0). Noise-independent selection The equilibrium selection in the noiseless limit is not sensitive to the commonality of the noise distribution F . Online Appendix A extends the model setup to establish noiseindependent selection (see Frankel et al. (2003), Section 6). Spillovers We can incorporate a spillover function wi (a−i |θ) to augment both ui (a−i |θ) and the payoffs to not adopting (now equal to wi (a−i |θ) instead of zero). Under this extension, the equilibrium selected in the limit along with all of the positive results remain. The measure mwi∗ (λ) will adjust accordingly to incorporate welfare spillovers, positively and negatively so when wi (a−i |θ) is positive and negative, respectively. Miscoordination costs As an application of the model under heterogeneous values, we can set vi = v − φdi to give: X ui (a−i |θ) = v + σ(θ) − φ (1 − aj ). (20) j∈Ni

Such a setup may be construed as homogeneous values under miscoordination costs. In this setting, an inverted analogue of the equilibrium described in Section 5 (homogenous values) obtains, with more connected coordination sets taking higher cutoffs. In equilibrium, agents’ links to coordination sets taking lower cutoffs carry zero weight, as these miscoordination costs are avoided with probability one. Links to others within one’s coordination set are penalized according to limit likelihoods placed on the neighbors not adopting. And, links to coordination sets taking higher cutoffs are penalized with weights one, with these costs being borne with probability one. Noteworthy, despite this 28

An analogous proof to Lemma 2 can be constructed. Beyond this, the theorem’s proof is identical.

30

inversion, global coordination on a common cutoff persists within the network families of Proposition 5. Online Appendix B addresses this setup in more detail.

8.2

Applications

Here we map either the basic model or its extensions to the three applications offered in the introduction: Platform adoption, crime, and immigration policy. Platform and Cryptocurrency Adoption The adoption of platforms, from currencies and online marketplaces to social media platforms, offer natural applications of our model, provided the value to users is increasing in the adoption by neighbors.29 Take, for example, the adoption by firms to deal in a given cryptocurrency (e.g. Bitcoin).30 The efficacy of the currency as a medium of exchange is increasing in its adoption by firms that take counterparty positions in business dealings (e.g. suppliers). Each firm i’s idiosyncratic value to using the currency can be captured by vi + σ(θ) (i.e. heterogeneous values), where θ captures the future stability or inflation of the currency. In addition to this value, i realizes a gain due to neighboring P counterparty firms’ adoption φ j∈Ni aj . Now, consider a third-party payment services provider offering cryptocurrency-based P services at price p > 0, leaving a net value to i of vi − p + σ(θ) + φ j∈Ni aj . The impact of a targeted subsidy by the provider, in the form of a decrease in the price charged to i or an increase to vi via granting i access to exclusive features, can be measured using mai . Precisely, assuming subsidy ∆p is provided for i’s adoption, the direct increase in revenue to the provider is measured by p − ∆p in all signal outcomes in which i had not adopted but now does, and by −∆p in all signal outcomes in which i adopts regardless of the subsidy. Taking s∗ as the equilibrium cutoff profile near the noiseless limit without the subsidy, the total expected marginal revenue mri (θ) to the provider conditional on θ 29 For products such as software, mobile phones, video game consoles, etc., there are strong peereffects, which are technological in nature: in order to interact, consumers need to adopt technologies compatible with those of their peers. Network effects are particularly pronounced in product categories with competing technological standards (see e.g., Van den Bulte and Stremersch (2004)). 30 We thank Ben Golub for suggesting this application.

31

can then be approximated by: i h X ∗ ∗ ∗ mri (θ) ≈ E p χ(sj ∈ (sj − ∆p · mai (1j ), sj ]) − ∆pχ(si > si − ∆p · mai (1i )) θ {z } | j∈N subsidy cost {z } | revenue from additional purchases      ∗ ∗ ∂θm ∂θm ν→0 ∗ ∗ ∗ ∗ ∗ −−−→ p|Cm |χ θ ∈ θm − ∆p ; i ∈ Cm , − ∆pχ θ > θm − ∆p , θm ∂vi ∂vi where χ denotes the indicator function.31 Thus, the optimal subsidy targets a firm i precisely when θ is slightly below s∗i , which converges on θi∗ as ν → 0. This yields a ∗ certain increase in revenue equal to p|Cm | − ∆p as ν → 0: the limiting optimal subsidy targets the largest coordination set. Per Proposition 11, mwi (θ) further incorporates the ex ante gains that subsidized adoption brings to coordination sets that take (i) lower limit cutoffs and (i) are directly connected to the targeted coordination set. As such, the welfare-maximizing target need not inhabit the largest coordination set. Crime It is well-established that delinquency is, to some extent, a group phenomenon, and the source of crime and delinquency is located in the intimate social networks of individuals (see e.g. Sutherland (1947), Warr (2002), Bayer et al. (2009), Dustmann and Piil Damm (2014)). Indeed, delinquents often have friends who have themselves committed several offenses, and social ties among delinquents are seen as a means whereby individuals exert an influence over one another to commit crimes. There are few network models of crime (see e.g. Ballester et al. (2010)) and, to the best of our knowledge, none that combines both explicit network structure and imperfect information on the probability of being caught in a crime model. Let us show how our model captures these different aspects. Consider a population of potential criminals. Allow ai = 1 to designate agent i’s choice to participate in crime. Criminal i’s relative experience and criminal competence is increasing in the criminality of neighbors (peer effects). Crime comes with a payoff of p > 0. Help from or payments to neighboring criminals comes at cost c > 0.32 We model P the probability of getting away with crime by ρ(θ) + τ j∈Ni aj with ρ increasing and yielding values in [0, 1 − τ di ]. Greater 1 − ρ(θ) (i.e. lower θ) corresponds with a greater presence of police or security. Denoting the cost of being caught by κ > 0, this gives the 31 32

When the provider itself holds a noisy signal of θ, it takes a conditional expectation of mri (θ). Costs incurred independent of i’s criminal activity can be captured by wi (a−i |θ); see Section 8.1.

32

conditional payoff function: ui (a−i |θ) =

ρ(θ) + τ

X

aj

j∈Ni

!

p−

1 − ρ(θ) − τ

aj

j∈Ni

= |{z} −κ + ρ(θ)(p + κ) + (τ (p + κ) − c) {z } | {z } | v

X

φ

σ(θ)

X

!

κ−c

X

aj

j∈Ni

aj .

j∈Ni

Provided τ (p + κ) > c, the incentive to partake in crime is increasing in the criminal activity of neighbors. Viewed through the lens of the results of Section 5, sparsely connected networks such as trees will exhibit sudden shifts in activity across the community when θ drops below some threshold. For networks with highly interconnected pockets of the community, criminal activity will arise more often amongst these pockets. Immigration Policy In 2015, more than a million migrants and refugees crossed into Europe. Most of these migrants, who came from the Middle East and Africa, were illegal. Some European countries such as Germany and Sweden were positively inclined towards these migrants whereas other countries, such as Poland and Hungary, were taking strong stance against any possibility of regularizing them. We can use our framework to model these different immigration policies by allowing ai = 0 to designate the government of country i’s choice to take an anti-immigration (i.e. “isolationist”) stance.33 The relative value of taking an inclusive policy (ai = 1), in the form of political support from electorates, is captured by σ(θ). θ may measure a perceived global need for pro-immigration policies, driven by perceptions of foreign conflict or severity of a refugee crisis. We model the inflow of immigrants into country i P by f + τ j∈Ni (1 − aj ), with τ > 0 capturing the overflow of migrants into neighboring country i when j ∈ Ni takes an anti-immigration stance. The marginal cost to migrant flow is given by c > 0. This gives conditional payoff function: ui (a−i |θ) = σ(θ) − c f + τ

X

(1 − aj )

j∈Ni

= −cf +σ(θ) − |{z} cτ |{z} φ

v

33

X

!

(1 − aj ).

j∈Ni

See Mangin and Zenou (2016) for a first model using global games to study illegal migration.

33

Thus, miscoordination costs obtain in this model (see Section 8.1). Here, countries in regions with many bordering neighbors are predicted to take anti-immigration stances in more states than countries that are geographically isolated. To avoid the different stances on immigration issues mentioned above, our model suggests that the European Union should have a common immigration policy so that all countries belonging to the union could coordinate on a common cut-off strategy. Such a common immigration policy avoids miscoordination costs from excessive migrant flows to pro-immigration countries.

9

Conclusion

This paper offers a first look into the properties of equilibrium selection in global games, within the context of a general network game of strategic complements with binary actions. This selection embodies equilibrium properties far removed from those exhibited in the network games literature. In the noiseless limit, proximal agents similarly connected within the network perfectly coordinate actions over states of the world. The reach of the model’s predictions, in particular those of sticky coordination and contained contagion, to applications such as technology, crime or public policy adoption, remains for the lens of empirical investigation. It is also left for future work to study the effects of signaling (Angeletos at. al (2006)) or signal jamming (Edmond (2013)) on equilibrium properties such as limit uniqueness and coordination partitioning. Dahleh et al. (2016) study information exchange through a social network, under a symmetric global game; the implications of information transmission under a general network game remains an open question. Equilibrium characterizations under more extensive departures from idiosyncratic noise, such as the introduction of a public signal, also remains for future research.34

34

See Weinstein and Yildiz (2007) and Morris et al. (2016) for contributions.

34

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38

Appendix Proof of Lemma 1. We first show that each agent best responds in G(ν) to a profile of cutoff strategies via a unique cutoff strategy. With σ(θ) strictly increasing and r(θ, s†j ; ν) weakly increasing in θ, it is immediate that the integrand in (4) is strictly increasing in si . There must then be a unique signal s∗i ∈ (θ − ν, θ + ν) that solves: Ui (π †−i |s∗i ) = 0,

(A1)

with adoption optimal for i if and only if si ≥ s∗i . By continuity of all payoffs in others’ cutoffs, we can applying Brouwer’s fixed point theorem giving the result.

Proof of Lemma 2. We first show that for ν > 0 and any pair i, j with cutoffs s†i , s†j , E[πj† (sj )|si = s†i ] + E[πi† (si )|sj = s†j ] = 1. In particular, when s†i = s†j = s∗ , E[πj† (sj )|si = s∗ ] =

1 = E[πi† (si )|sj = s∗ ]. 2

Given si = s†i , the conditional distribution of θ is s†i − νǫi , so: Pr(s†i − νǫi ≤ θ) = 1 − F

s†i − θ ν

!

.

Moreover, conditional on θ the distribution of sj is θ + νǫj , so: E[πj† (sj )|θ] = Pr(θ + νǫj ≥ s†j ) = 1 − F

s†j − θ ν

!

.

Using the law of iterated expectations: E[πj† (sj )|si

=

s†i ]

=

Z ( θ

1−F

s†j − θ ν

39

!) "

d 1−F

s†i − θ ν

!#

.

Similarly: E[πi† (si )|sj = s†j ] =

Z (

s†i − θ ν

1−F

θ

!) "

d 1−F

s†j − θ ν

!#

Taking a sum and using the product rule: E[πj† (sj )|si = s†i ] + E[πi† (si )|sj = s†j ] =

("

s†i − θ ν

1−F

!# "

1−F

s†j − θ ν

!#)θ=+∞ θ=−∞

= (1 − 0)(1 − 0) − (1 − 1)(1 − 1) = 1. The limiting result (9) follows, since (5) holds for any cutoff and any ν, it continues to hold in the limit as ν goes to zero. To show (6), recall that: E[πj† (sj )|si = s†i ] =

Z (

1−F

Θ

s†j − θ ν

!) "

d 1−F

s†i − θ ν

!#

We change variable by letting z = (θ − s†i )/ν, then: E[πj† (sj )|si = s†i ] = −

Z (

s†j − s†i −z ν

1−F

Θ

!)

When limν→0 s†i < limν→0 s†j , for each fixed z: (

1−F

s†j − s†i −z ν

!)

→ 0, as ν → 0.

So by Dominant Convergence Theorem: lim

ν→0

E[πj† (sj )|si

=

s†i ]

=

Z

0dF (z) = 0. θ

Similarly we can show: limν→0 E[πi† (si )|sj = s†j ] = 1.

Proof of Theorem 1. We start with a lemma.

40

dF (−z).

Lemma 3. The unique vector q∗ , the projection of 0 onto the Φ(W), is uniquely characterized by the following two conditions: P (C1) q∗ ∈ Φ(W), i.e. there exists w∗ such that qi∗ = vi + φ j∈Ni wij∗ , ∀i, (C2) for any edge (i, j) ∈ E and for any zij ∈ [0, 1], (qi∗ − qj∗ )(zij − wij∗ ) ≥ 0. Moreover, we can replace (C2) by the equivalent form: ∗ (C2’) (i, j) ∈ E, (qi∗ − qj∗ ) > 0 =⇒ wij∗ = 0, wji = 1. Proof. We first show necessity. Clearly (C1) is just the feasibility condition, hence necessary. For (C2), for any w′ ∈ W, by optimality of q∗ , the following must be true: η(t) := ||Φ((1 − t)w∗ + tw′ )||2 ≥ ||Φ(w∗ )||2 = ||q∗ ||2 = η(0) for any t ∈ [0, 1]. ∂ Since Φ(·) is an affine mapping, ∂t Φ((1 − t)w∗ + tw′ ) = Φ(w′ ) − Φ(w∗ ). Taking the derivative of η(t) at t = 0, we obtain: 0 ≤ η ′ (0) = 2hq∗ , Φ(w′ ) − Φ(w∗ )i.

(A2)

Now for any zij′ ∈ [0, 1], we construct a special w′ by only modifying the weights wij∗ ∗ ′ and wji = 1 − wij∗ on the edge between i and j in w∗ to wij′ = zij and wji = 1 − zij . Clearly, w′ is still in W. Inequality (A2) becomes: ∗ )) ≥ 0. φ(qi∗ (zij − wij∗ ) + qj∗ (zji − wji ∗ However, zji − wji = (1 − zij ) − (1 − wij∗ ) = −(zij − wij∗ ). So the above inequality is equivalent to: (qi∗ − qj∗ )(zij − wij∗ ) ≥ 0.

Let us show sufficiency. For any w′ ∈ W, simple calculation shows that: hq∗ , Φ(w′ ) − Φ(w∗ )i = φ

X

(qi∗ − qj∗ )(wij′ − wij∗ ) ≥ 0,

as each term in the summation is nonnegative. Therefore, η ′ (0) ≥ 0, moreover η(·) is

41

clearly convex in t ∈ [0, 1].35 Therefore, η(1) − η(0) ≥ (1 − 0)η ′ (0) ≥ 0, that is: ||Φ(w′ )||2 ≥ ||Φ(w∗ )||2 = ||q∗ ||2 since w′ is arbitrary, and indeed q∗ is the projection of 0 onto Φ(W). Now we need to verify that for any edge ij with (i, j) ∈ E, (C2) is equivalent to (C2’): 

 ∗ (qi∗ − qj∗ )(zij − wij∗ ) ≥ 0, ∀zij ∈ [0, 1] ⇔ (i, j) ∈ E, (qi∗ − qj∗ ) > 0 ⇒ wij∗ = 0, wji =1 .

∗ ∗ If so, then qi∗ > qj∗ =⇒ wij∗ = 0 and wji = 1; qi∗ < qj∗ =⇒ wij∗ = 1 and wji = 0. ∗ ∗ ∗ ∗ From (C2) to (C2’): Suppose qi > qj , and let zij = 0. We have (qi − qj )(0 − wij∗ ) ≥ 0, and by wij∗ ≥ 0 it must be the case that wij∗ = 0. Similarly, assuming qi∗ < qj∗ and picking zij = 1 shows that wij∗ = 1. From (C2’) to (C2): If qi∗ > qj∗ and wij∗ = 0, then for any ∀zij ∈ [0, 1], (qi∗ − qj∗ )(zij − wij∗ ) = (qi∗ − qj∗ )(zij ) ≥ 0. Similarly, if qi∗ < qj∗ and wij∗ = 1, then for any ∀zij ∈ [0, 1], (qi∗ − qj∗ )(zij − wij∗ ) = −(qi∗ − qj∗ )(1 − zij ) ≥ 0.

Let us now prove the theorem. First, we write down a few necessary conditions for the limiting equilibrium. The cutoffs in the limit must satisfy the indifference conditions: vi + σ(θi∗ ) + φ

X

wij∗ = 0, ∀i,

j∈Ni

where wij∗ = lim E[πj† (sj )|si = s†i ]. ν→0

∗ Clearly, wij∗ + wji = 1 by Lemma 2. Let qi∗ = −σ(θi∗ ), i ∈ N . Then θi∗ < θj∗ if and only P if qi∗ > qj∗ . Then qi∗ = vi + j∈Ni wij∗ , ∀i. Moreover, for any connected node i and j, ∗ suppose θi∗ < θj∗ , then qi∗ > qj∗ , and wij∗ = 0 and wji = 1 by Lemma 2. ∗ As a result, q satisfies the two conditions stated in Lemma 3, therefore q∗ must be the projection of 0 onto Φ(W), which proves the theorem.

35

As Φ is affine and ||x||2 is a convex function of x

42

Proof of Proposition 2. We first prove Proposition 4 and extend to condition (10) of Proposition 2. By Theorem 1, existence of a single coordination set is equivalent to: T 1 ∈ Φ(W), n P where T = i vi + φe(N ). This can be re-formulated as a feasibility condition to the following linear programming problem: vi + φ

X

wij =

j∈Ni

T , ∀i ∈ N, n

wij ≥ 0, wij + wji = 1, ∀(i, j) ∈ E. given homogeneous valuations, vi = v, ∀i, and T = above system is equivalent to:

X

wij =

j∈Ni

P

vi + φe(N ) = nv + φe(N ). So the

e(N ) , ∀i ∈ N, |N |

(A3)

wij ≥ 0, wij + wji = 1, ∀(i, j) ∈ E. To show the necessity, suppose there exists a solution w∗ to system (A3). Then: |X|

e(N ) X X ∗ = ( wij ) ≥ |N | i∈X j∈N i

X

wij∗ = e(X) · (1) = e(X)

i,j∈X:(i,j)∈E

where the first inequality is trivial, and the second inequality follows from the fact that ∗ for each edge with two end nodes i, j both in X, wij∗ + wji = 1, there are exactly e(X) such links in the summation. To show sufficiency, we first re-formulate the above condition as a feasibility condition to a network flow problem, and apply Gale’s Demand Theorem (see Gale (1957)). From ˜ = (V, A), the original network G = (N, E), we construct a specific bipartite network G where the set of nodes is the union V = V1 ∪ V2 where V1 = E and V2 = N . The arcs ˜ are only from V1 to V2 . In particular, f ∈ E = V1 is connected to i ∈ N = V2 (flow) in G ˜ = (V, A), if and only if i is one of the end-points of this edge f in the bipartite graph G in the original network G. Clearly |V1 | = e(N ), and |V2 | = |N |. ) Each vertex i ∈ V2 is a demand vertex, demanding di = e(N units of a homogeneous |N | goods. Each vertex in j ∈ V1 is a supply vertex, supplying sj = 1 unit of the same 43

good.36 Supply can be shipped to demand nodes only along the arcs A in the constructed ˜ Gale’s Demand Theorem states that there is a feasible way to match bipartite network G. demand and supply if and only if for all X ⊂ V2 : X

di ≤

i∈X

X

sj ,

j∈N (X)

˜ Substituting the where here N (X) denotes the set of neighbors of vertices in X in G. values of sj , di yields the following equivalent condition |X|

e(N ) ≤ |N (X)|, |N |

∀ ∅ ⊂ X ⊂ V2 .

Clearly the above condition holds when X is either empty or the whole set N . For any ˜ the set N (X) is only the edges in E such other case of X, from the construction of G, that at least one endpoint belongs to X. Therefore: |N (X)| = e(N ) − e(X c ) where X c = N \X is the complement set of X. Recall that: |N | = |X| + |X c |, e(N ) = |N (X)| + e(X c ), It is easy to see that: |X|

e(N ) e(N ) |N (X)| e(N ) e(N ) − e(X c ) e(X c ) e(N ) ≤ |N (X)| ⇐⇒ ≤ ⇐⇒ ≤ ⇐⇒ ≤ . c c |N | |N | |X| |N | |N | − |X | |X | |N |

So the feasibility condition is equivalent to the following: e(N ) e(X c ) ≤ , |X c | |N |

∀ ∅ 6= X c ⊂ N.

Since X is an arbitrary subset of N , and X c is also arbitrary, the sufficiency direction is proved. This establishes Proposition 4. To prove condition (10), the proof is analogous provided we modify the values of ∗ ∗ demand dj and supply si , accounting for vi , links between Cm and Cm and constraining ¯ 36

Here we abuse notation, using di and sj for demand and supply in lieu of i’s degree and j’s signal realization, respectively.

44

∗ to subgraph GCm∗ . For this, define V˜1 = ECm∗ and V˜2 = Cm . Define: ∗ ∗ ∗ ∗ v(Cm ) + φ(e(Cm , Cm ) + e(Cm )) ∗ ¯ s˜j = φ, ∀j ∈ V˜1 , and d˜i = − (vi + φdi (Cm )), ∀i ∈ V˜2 , ∗ ¯ |Cm |

It is straight forward to check that: X

∗ s˜j = φe(Cm )=

j∈V˜1

X

d˜i .

i∈V˜2

The result just follows from Gale’s Demand Theorem. ∗ To show expression (11), take weighting matrix w∗ . Given θi∗ = θj∗ = θm for each ∗ i, j ∈ Cm by definition, it must be that: ∗ ∗ )= |Cm |σ(θm

X

σ(θi∗ ) =

X

vi + φ

∗ i∈Cm

∗ i∈Cm

=

X

∗ i∈Cm

=

X

wij∗

j∈Ni





vi + φ 

∗ v(Cm )

+

!

X

wij∗ +

∗ j∈Cm

∗ j∈Ni \Cm

∗ ∗ φ(e(Cm , Cm )

¯

X

+

∗ e(Cm )),



wij∗ 

the final equality following from Lemma 3. Expression (11) follows.

Proof of Proposition 3. We prove the first statement by induction on step k. Take k = 1. P By Theorem 1, the qi∗ = vi + φ j∈Ni wij∗ . So, given any nonempty subset X ⊆ N : X i∈X

qi∗ =

X

(vi + φ

i∈X

= v(X) + φ

X

wij∗ ) =

j∈Ni

X i∈X

X X

wij∗ +φ

{z

=e(X)

XX

wij∗

i∈X j∈Ni

X X

wij∗ ≥ v(X) + φe(X)

i∈X j∈Ni ∩X c

i∈X j∈Ni ∩X

|

vi + φ

}

{z

|

≥0

}

P P Here, i∈X j∈Ni ∩X wij∗ = e(X) as the sum of weights for each link is exactly one, and there are exactly e(X) such links. As a result: v(X) + φe(X) ψ(X|∅) := ≤ |X| 45

P

i∈X

|X|

qi∗

≤ max qi∗ . i∈N

(A4)

This shows that maxi∈N qi∗ is indeed a upper bound for ψ(·|∅). Next we show that this upper bound is obtained. Define: X ∗ = {i ∈ N : qi∗ = max qj∗ } j∈N

Then X ∗ is nonempty. Moreover, for each i ∈ X and each j ∈ Ni ∩ (N \X), we have P P qj∗ < qi∗ = maxk∈N qk∗ , as a result, wij∗ = 0. So, i∈X j∈Ni ∩(N \X) wij∗ = 0. Hence: v(X ∗ ) + φe(X ∗ ) ψ(X |∅) := = |X ∗ | ∗

P

∗ i∈X ∗ qi |X ∗ |

= max qi∗ . i∈N

By construction, we also know that X ∗ is the largest maximizer of ψ(·|∅) (otherwise the last inequality in (A4) will be strict). In fact, X ∗ is the union of the coordination sets in C ∗ such that the cutoff is greatest. We can then partition X ∗ into disjoint, connected subsets to obtain the limit coordination sets. As a summary, in the first step of the algorithm, the first cutoff value ∗ θ1 = σ −1 (− maxt∈N qt∗ ) is found and the corresponding coordination sets are also found. The case for each step k > 1 is similar; the result follows by induction. Finally, the algorithm must terminate in finite steps, as the set Ak is strictly growing in each step. To show the second statement of the proposition, the following lemma shows that indeed the largest solution of ψ(·|A) is well-defined. Lemma 4. Fixing subset A of N , define function ψ(·|A) from X ∈ 2N \A \{∅} to R as follows: v(X) + φ(e(X, A) + e(X)) ψ(X|A) := . |X| Then if both X and Y are maximizer of ψ(·|A), then X ∪ Y is also a maximizer. If X ∩ Y is not empty, then X ∩ Y is also a maximizer of ψ(·|A). Proof. Let β = max∅6=S⊆N \A ψ(S|A). If both X and Y are maximizer of ψ(·|A), then: v(X) + v(Y ) = v(X ∩ Y ) + v(X ∪ Y ), e(X, A) + e(Y, A) = e(X ∩ Y, A) + e(X ∪ Y, A), e(X) + e(Y ) ≤ e(X ∩ Y ) + e(X ∪ Y ). The first two results direct follow from the definition of v(·), and e(·, A) (recall that X and Y are disjointed from A by assumption). The last inequality follows from the observation

46

that: e(X ∩ Y ) + e(X ∪ Y ) − e(X) − e(Y ) = e(X\Y, Y \X) ≥ 0. Assume that X ∩ Y is not empty, then we have the following inequalities: ψ(X ∩ Y |A)|X ∩ Y | + ψ(X ∪ Y |A)|X ∪ Y | ≤ β|X ∩ Y | + β|X ∪ Y | = β|X| + β|Y | = ψ(X|A)|X| + ψ(Y |A)|Y | = v(X) + φ(e(X, A) + e(X)) + v(Y ) + φ(e(Y, A) + e(Y )) ≤ v(X ∩ Y ) + φ(e(X ∩ Y, A) + e(X ∩ Y )) +v(X ∪ Y ) + φ(e(X ∪ Y, A) + e(X ∪ Y )) = ψ(X ∩ Y |A)|X ∩ Y | + ψ(X ∪ Y |A)|X ∪ Y |, As a result, all the inequalities are equalities. In particular, ψ(X ∪ Y |A) = ψ(X ∩ Y |A) = β, i.e., X ∩ Y and X ∪ Y are both maximizers of ψ(·|A). When X ∩ Y = ∅, similarly we can show: ψ(X ∪ Y |A)|X ∪ Y | ≤ β|X ∩ Y | +β|X ∪ Y | | {z } =0

= β|X| + β|Y |

= ψ(X|A)|X| + ψ(Y |A)|Y | = v(X) + φ(e(X, A) + e(X)) + v(Y ) + φ(e(Y, A) + e(Y )) ≤ v(X ∩ Y ) + φ(e(X ∩ Y, A) + e(X ∩ Y )) | {z } =0

+v(X ∪ Y ) + φ(e(X ∪ Y, A) + e(X ∪ Y ))

= ψ(X ∪ Y |A)|X ∪ Y |, which implies that ψ(X ∪ Y |A) is also a maximizer of ψ(·|A). The second statement of the proposition now follows from Lemma 4.

47

Proof of Corollary 1. Take v and φ and corresponding q∗ from Theorem 1. For each v ′ 6= v it must be that qi′ ∗ = qi∗ + (v − v ′ )1, as Φ′ (W) under v ′ is: Φ′ (W) = {q + (v − v ′ )1 : q ∈ Φ(W)}. Thus, qi∗ = qj∗ if and only if qi′ ∗ = qj′ ∗ : C ∗ is independent of v. This also shows that q∗ is ∂q ∗ affine in v with ∂vi = 1. Setting v = 0, again take φ and corresponding q∗ from Theorem 1. For each positive ′ φ′ 6= φ it must be that qi′ ∗ = φφ qi∗ , as Φ′ (W) under φ′ is: Φ′ (W) = {

φ′ q : q ∈ Φ(W)}. φ

Again, qi∗ = qj∗ if and only if qi′ ∗ = qj′ ∗ : C ∗ is independent of φ. Again, this shows that q∗ is affine in φ. q∗ = v1 + φq∗0 then follows.

Proof of Proposition 4. See Proof of Proposition 2.

Proof of Proposition 5. ForPany regular network with degree d, for any non empty subset P e(X) ) i∈X di (X) i∈X d X, 2 |X| = ≤ |X| = d = 2 e(N , so regular graph is always balanced, in |X| |N | particular, qi∗ = qj∗ = v + dφ/2 for each i, j ∈ N and C ∗ = {N } by Theorem 1. For trees, there are no cycles, so e(N ) = N − 1, while for each subset X the resulting subnetwork GX is still cycle-free. Therefore, the number of edges within X is at most |X| − 1, so e(X) ≤ |X| − 1, and thus: e(X) |X| − 1 e(N ) |N | − 1 ≤ ≤ = . |X| |X| |N | |N | For regular bipartite networks with two disjoint sides X1 , X2 with sizes n1 , n2 , we set 2 1 if i ∈ N1 , j ∈ N2 , and wij∗ = n1n+n if i ∈ N2 , j ∈ N1 . Clearly this w∗ is = n1n+n 2 2 ) a feasible solution to (A3), with di wij∗ = ne(N ∈ (0, 1) for each i ∈ N . Therefore by 1 +n2 ∗ ∗ Lemma 3, qi = qj for all i, j ∈ N . If G is a network with a unique cycle, then e(N ) = N . For each subset X, the resulting subnetwork GX contains at most one cycle, so the number of edges within X is at most wij∗

48

|X|, so that e(X) ≤ |X|, and thus: |X| e(N ) e(X) ≤ =1= |X| |X| |N | When G contains at most four nodes, all networks with three or fewer nodes contain at most one cycle. The only network structures over four nodes that contain more than one cycle are the circle with a link connecting one non-adjacent pair i and j (two networks) and the complete network. For the former, we can show these networks to have one ∗ ∗ ∗ ∗ coordination set with weights: wij∗ = wji = 1/2, wki = wkj = 5/8 and wij∗ = wik = 3/8 for each k 6= i, j. Each weight is within (0, 1) and thus by Lemma 3, qi∗ = qj∗ = qk∗ for each k 6= i, j. The complete network with 4 nodes and 6 edges is regular, and clearly has a symmetric equilibrium (i.e. one coordination set). Note, when N = 5, there exists a network such that two coordination sets emerges. For example, a core with 4 nodes plus one periphery node having one link to one of the core nodes.

Proof of Proposition 6. For part 1., s∗i ≤ s∗j for all i ∈ X and j in regular network G of degree d follows from supermodularity of G(ν), uniqueness of s∗ for ν small, and di ≥ d for each i ∈ X. By continuity, maxi∈X θi∗ ≤ θdr∗ . ∗ ∗ ∗ For part 2., take coordination set Cm and i ∈ argmini∈Cm∗ di (Cm ∪ Cm ). i’s expected ¯ ∗ ¯ ¯ ∗ network effect in G(ν) is no greater than d = di (Cm ∪Cm ), which equals expected network ¯ ¯ effect to each k in a regular network of degree 2d. Thus, s∗i ≥ s∗k for all ν > 0 small. By ¯ r∗ . continuity, θi∗ ≥ θ2d ¯

Proof of Proposition 7. Suppose not. If each coordination set is of size one, then consider the node i with the highest qi∗ . Clearly, qi∗ > qj∗ , for any j ∈ Ni . It follows that wij = 0 P P ∗ for all j ∈ Ni , so qi∗ = v + φ j∈Ni wij∗ = v. Since qi = |N |v + e(N ) > |N |v, so qi∗ = v implies i cannot have the highest qi∗ . ∗ ∗ Proof of Proposition 8. Given C+ij = C ∗ , Cm is unchanged upon inclusion of link (i, j). ∗ ∗ Moreover, if θm(i) > θm(j) , then this ordering must maintain upon inclusion of (i, j), else

49

∗ contradicting C+ij = C ∗ . We may directly apply (11) of Proposition 2: ∗ ∗ ∗ ∗ v(Cm ) + φ(e(Cm , Cm ) + e(Cm )) ¯ , ∗ |Cm | ∗ ∗ ∗ ∗ v(Cm ) + φ(e(Cm , Cm ) + e(Cm ) + 1) ¯∗ = , |Cm | ∗ ∗ ∗ = qm(j) if θm(i) > θm(j) ,

∗ qm(i) = ∗ qm(i),+ij ∗ qm(j),+ij

∗ ∗ the second equality holding whether j ∈ / m(i) with θm(i) > θm(j) (for 1.) or j ∈ m(i) (for ∗ ∗ 2.). Differencing qm(j),+ij and qm(j) gives the result.

Proof of Proposition 9. To show (14), denote qˆj∗ and qj∗ the limit equilibrium cutoffs of ˇ j ∈ N when vi = vˆi∗ and vi = vi∗ , respectively. qˆi∗ > qi∗ with qˆj∗ ≥ qj∗ for j 6= i ˇ ˇ ˇ given uniqueness of θ ∗ and strategic complementarities. For any w∗ of Theorem 1 under ˇ ˆ ∗ under vi = vi∗ with wˆij∗ ≤ wij∗ for each j 6= i. Moreover, vi = vˆi∗ , we can find some w ˇ ˇ ∗ by construction wˆij∗ = 0 and wij∗ = 1 for each j ∈ Cm . At each vi , qi∗ must satisfy ˇ P qi∗ = vi + φ j∈Ni wij∗ . Evaluating vi at vˆi and vi , and taking differences gives: ˇ X vˆi − vi = (ˆ qi∗ − qi∗ ) + φ (wij∗ − wˆij∗ ) ˇ ˇ ˇ j∈Ni   X ∗ )+ (wij∗ − wˆij∗ ) = (ˆ qi∗ − qi∗ ) + φ di (Cm ˇ ˇ j∈N \C ∗ i

≥

m

∗ ), φdi (Cm

giving inequality (14). To show equality (15), first by Proposition 2 expression (11), we can write: ∗ qm =

∗ ∗ ∗ ∗ vi + v(Cm \{i}) + φ(e(Cm , Cm ) + e(Cm )) ¯ . ∗ |Cm |

(A5)

∗ ∗ At v1 = vˆi∗ by Proposition 2 and wij∗ = 0 for each j ∈ Cm \{i}, we have qˆm = qˆi∗ = ∗ vˆi∗ + φdi (Cm ), which by equating with (A5) at vi = vˆi∗ gives: ¯

vˆi∗ =

∗ ∗ ∗ ∗ ∗ ∗ v(Cm \{i}) + φ(−|Cm |di (Cm ) + e(Cm , Cm ) + e(Cm )) ¯ ¯ . ∗|−1 |Cm

(A6)

∗ ∗ ∗ ∗ At v1 = vi∗ , wij∗ = 1 for each j ∈ Cm \{i}, giving qm = qi∗ = vi∗ + φ(di (Cm ) + di (Cm )), ¯ ˇ ˇ ˇ ˇ

50

which by equating with (A5) at vi = vi∗ gives: ˇ vi∗ = ˇ

∗ ∗ ∗ ∗ ∗ ∗ ∗ v(Cm \{i}) + φ(−|Cm |(di (Cm ) + di (Cm )) + e(Cm , Cm ) + e(Cm )) ¯ ∗ ¯ . |Cm | − 1

(A7)

Differencing (A6) and (A7) yields equality (15).

Proof of Proposition 10. Lipschitz continuity. Note that q∗ is the projection of 0 onto the space Φ(W): q∗ (v) = ProjΦ(W ) [0]. Since Φ depends on v in a linear way, we let K = Φ(W) when v = 0. Then for any v: Φ(W) = v + K. We can rewrite the projection problem as follows: q∗ (v) = arg min ||z||2 = v + arg min ||(−v) − y||2 = v + ProjK [−v] z∈v+K

y∈K

The projection mapping is nonexpansive (see chapter 1 of Nagurney 1992), i.e: ||ProjK [x] − ProjK [y]|| ≤ ||x − y||, ∀x, y ∈ Rn . So for any v and v′ , we have ||q∗ (v) − q∗ (v′ )|| = ||(v + ProjK [−v]) − (v′ + ProjK [−v′ ])|| ≤ ||v − v′ || + ||ProjK [−v]) − ProjK [−v′ ]|| ≤ 2||v − v′ ||. Hence, q∗ (v) is Lipschitz continuous in v. Comparative Statics. By Lipschitz continuity, q∗ (v) is differentiable for almost all v. By ∗ ∗ ∗ Proposition 2 expression (11), for each coordination set Cm , qi∗ = qm = −σ(θm ) for each ∗ ∗ i ∈ Cm , with qm given by: ∗ qm

=

P

∗ i∈Cm

∗ ∗ ∗ vi + φ(e(Cm , Cm ) + e(Cm )) ¯ . ∗| |Cm

51

∗ ∗ ∗ Note that the terms e(Cm , Cm ) and e(Cm ) are constant holding C ∗ constant. For generic ¯ ∗ ∗ ∗ v, C ∗ is locally constant, hence e(Cm , Cm ) and e(Cm ) do not depend on v locally. The ¯ derivative results follows directly.

Monotonicity. ∂q∗ /∂v is nonnegative, so q∗ is monotone in v.

∗ ∗ Proof of Remark 4. Near the limit (ν > 0), for k ∈ / m(i)∗ with θm(i) 6= θm(k) , then ∗ ∗ s∗k ∈ / (s∗i − ν, s∗i + ν) for ν > 0 sufficiently small (i.e. for ν ≪ |θm(i) − θm(k) |/2), and ′ ∗ ′ thus for all i ∈ Cm(i) , ai′ either equals one or zero (depending on m < m or m′ > m, respectively) with probability one conditioning on sk = s∗k . Because this is true for arbitrary k, it is also true for all members of any m′ 6= m(i) (including m(j)) for ν > 0 ∗ ∗ sufficiently small (i.e. for ν ≪ minm′ 6=m(i) |θm(i) − θm ′ |/2). Given no atoms of F , this ∗ ∗ must hold in a neighborhood of si , which implies ∂sj /∂s∗i = 0 for all j ∈ / m(i). If instead ∗ ∗ ∗ ∗ k∈ / m(i)∗ but θm(i) = θm(k) , by ∂s∗j /∂vi = 0 for each j ∈ / m(i)∗ when θm(i) 6= θm(j) and by ∗ ∗ ∗ ∗ ∗ ∗ Cm(k) , Cm(j) disjoint by assumption, ∂sj /∂si = 0 again follows. ∂sj /∂si = 0 then implies ∂s∗j /∂vi = 0.

∗ Proof of Proposition 11. To compute the adoption probabilities for each player j ∈ Cm , 1 ∗ ∗ the common cutoff θm drops by exactly σ′ (θ∗ )|C ∗ | , and the density of the state θ near θm m m ∗ ∗ is just H ′ (θm ). Moreover there are |Cm | players in the coordination set containing player i, and thus expression (18) follows. To compute ex ante welfare, we first note that:

ωj := lim Esj [Uj (πj (π −j )|sj ] = ν→0

Z

+∞

(vj + σ(θ) + φ θj∗

X

χ({θ > θj∗ })))dH(θ),

(A8)

k∈Nj

∗ ∗ for indicator function χ. If j ∈ C¯m or if θj∗ = θi∗ with j ∈ / Cm , then the impact of vi on ∗ ∗ ωj is zero. This leaves j in Cm or Cm . We can write: ¯ Z ∞ XZ ∞ dH(θ). (vj + σ(θ))dH(θ) + φ ωj = θj∗

k∈Nj

52

max(θj∗ ,θk∗ )

∗ ∗ Recall that as vi increases, only θj∗ for those j ∈ Cm change. If j ∈ Cm , the cutoff θj is ¯ ∗ ∗ not affected by vi . Moreover θj ≤ θi , implying:

∂ωj ∂vi

=



∂  φ ∂vi k∈N ′

=

XZ j



+∞ max(θj∗ ,θk∗ )

H (θ∗ ) φ ′ ∗ m ∗ |Nk σ (θm )|Cm |

dH(θ)

∗ ∩ Cm |=φ

∗ H ′ (θm ) ∗ e({k}, Cm ). ′ ∗ ∗| σ (θm )|Cm

∗ ∗ If instead j ∈ Cm (j = i potentially), by Proposition 10 i and j have the same cutoff θm ∗ in some neighborhood of vi : θj∗ = θm . Thus we have:

∂ωj ∂vi

1 ∗ ∗ ∗ = χ({j = i})(1 − H(θm )) + dH(θm )(vj + σ(θm )) ′ ∗ ∗| σ (θm )|Cm   Z ∂  X ∞ φ dH(θ) , + ∗ ,θ ∗ ) ∂vi max(θ j k k∈N j

XZ

k∈Nj

∞

X

dH(θ) = max(θj∗ ,θk∗ )

∗ k∈Nj ∩Cm

¯

+

X

Z

dH(θ) +

¯∗ k∈Nj ∩C m

X

=

∗ k∈Nj ∩Cm ¯

+

X

Z

∗ )|C ∗ | σ ′ (θm m

∞ max(θj∗ ,θk∗ )

Z

X

∗ k∈Nj ∩Cm

∞

Z

= − ∂vji . Note that: ∞

dH(θ) max(θj∗ ,θk∗ )

dH(θ)

max(θj∗ ,θk∗ )

∞

dH(θ) + ∗ θm

¯∗ k∈Nj ∩C m

∂θ ∗

1

by applying Leibniz integral rule to (A8), and substituting

X

∗ k∈Nj ∩Cm

Z

∞

Z

∞

dH(θ) ∗ θm

dH(θ).

θk∗

∗ ∗ Note that if k ∈ Nj ∩ Cm , max(θj∗ , θk∗ ) = θj∗ = θm ; similarly for other terms. Therefore: ¯   Z ∞ X H ′ (θ∗ ) ∂  ∗ ∗ φ dH(θ) = φ ′ ∗ m ∗ e({j}, Cm ∪ Cm ), ¯ ∗ ∗ ∂vi σ (θ )|C | max(θ ,θ ) m m j k k∈N j

∗ noting that ∂θk∗ /∂vi = 0 when k ∈ Nj ∩ C¯m . Together with the equilibrium condition

53

∗ (recall that j ∈ Cm by assumption):

vj + σ(θj∗ ) + φ

X

∗ wjk = 0, =⇒ vj + σ(θj∗ ) = vj + σ(θm ) = −φ

X

wjk .

k∈Nj

k∈Nj

We may now simplify: X ∂ωj H ′ (θ∗ ) H ′ (θ∗ ) ∗ ∗ ∗ wjk ) ′ ∗ m ∗ + φ ′ ∗ m ∗ e({j}, Cm ∪ Cm ). = χ(k = i)(1 − H(θm )) − (φ ¯ ∂vi σ (θ )|C | σ (θ )|C | m m m m k∈N j

Summing over all the agents in both sets, we can obtain an aggregate effect of: P

ωj ∂vi j

 ′ ∗ H (θm ) Z = (1 − +φ ∗ |C | σ ′ (θ∗ )   m∗ ∗ m ∗ ∗ ) e(Cm , Cm ) + e(Cm ) H ′ (θm ∗ ¯ = (1 − H(θm )) + φ . ∗ ′ ∗ |Cm | σ (θm ) ∗ H(θm ))



It suffices to compute: Z := =

X

∗ e({j}, Cm )+

∗ j∈Cm ¯ ∗ ∗ e(Cm , Cm )

+

X

∗ j∈Cm ∗ ∗ (e(Cm , Cm )

¯ ¯ ∗ ∗ ∗ = e(Cm , Cm ) + e(Cm ). ¯

+

∗ 2e(Cm ))

To show the second equality (second line), the sum X X

∗ k∈N j∈Cm j

wjk =

X

X

∗ k∈N ∩C ∗ j∈Cm j ¯m

wjk +

X

∗ ∗ e({j}, Cm ∪ Cm )− ¯

X

−

P

X

k∈Nj ∗ ∗ (e(Cm , Cm )

¯

∗ j∈Cm

∗ k∈N ∩C ∗ j∈Cm j m

wjk

P

k∈Nj

wjk +



∗ + e(Cm ))

wjk can be written:

X

X

wjk .

∗ ¯∗ j∈Cm k∈Nj ∩C m

∗ ∗ ∗ Given j ∈ Cm , wjk = 1 when k ∈ Nj ∩ Cm , and wjk = 0 when k ∈ Nj ∩ C¯m , we ¯ P P P P ∗ ∗ have: (i) j∈Cm∗ k∈Nj ∩Cm∗ wjk = e(Cm , Cm ), (ii) j∈Cm∗ k∈Nj ∩C¯m∗ wjk = 0, and (iii) ¯ P P ¯ ∗ ∗ ∗ ∗ wjk = e(Cm ), as the limit probabilities on each edge in Cm sum to one j∈Cm k∈Nj ∩Cm P P ∗ ∗ ∗ by Lemma 2. It then follows that j∈Cm∗ k∈Nj wjk = e(Cm , Cm ) + e(Cm ). ¯

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